By Abigail Caplovitz Field | February 2, 2012
WARNING: Attention homeowners: Do not read this post as legal advice. Although the information in this post is true, securitization fail, even of your loan, will not typically prevent the bank from foreclosing on you, unless you have a good lawyer. Even then, realistic end game is a sustainable modification, not a free house. More after the post.
The criminal securities fraud at the heart of the financial crisis has one very under-reported aspect: “securitization fail.” Once you understand the securitization fail concept, you can instantly, with tremendous clarity, see the scale of the fraud the Bailed Out Banks and Wall Street firms committed and commit every day. Get securitization fail, and the bankers’ crimes stand out like a vast herd of bison on the South Dakota prairie, a herd much bigger than this one.
Perhaps the most critical insight that flows from understanding securitization fail, however, is that the crimes will continue so long as we are processing foreclosures. When you understand securitization fail, you understand the scale of liability the Bailed Out Bankers created for themselves, and why foreclosure fraud is their preferred escape route. In fact, you’ll understand why the banks will continue to commit foreclosure fraud regardless of signing the settlement with law enforcers. Get securitization fail and you understand that a thorough investigation could straightforwardly document it, and create so much leverage for law enforcement that it could essentially dictate terms of settlement.
Caving on Securitization Fail
So that’s the multi-billion dollar question about the servicer “settlement” being foisted on the states by the big banks and the feds: is any attorney general who signs up for it is giving up any claims related to securitization fail and all the leverage that flows from them? Based on Nevada AG Masto’s letter, it sure looks like the AGs are. I only phrase it as a question because the actual settlement language isn’t public yet, and it runs counter to all the messaging that only post-securities conduct is covered by the settlement. Not that I think the messaging on the settlement is remotely credible as a general matter.
For reasons explained near the end of this post, only two AGs really have securitization fail claims: New York and Delaware. And DE AG Beau Biden has rejected the settlement, but NY AG Eric Schneiderrman is flirting with joining in. Given the likely release of securitization fail, Eric Schneiderman’s signing the deal would be a profound betrayal of New Yorkers, and frankly, all Americans.
Ok. To really understand the stakes, you need to understand securitization fail. Before you can understand securitization fail, you have to understand securitization.
The Securitization Idea
Imagine I come to you and say:
hey, have I got a great investment opportunity for you! Give me $100, and you’ll get $106 at the end of the year. Don’t worry, it’s virtually a sure thing. See, I’m going to take your hundred–and a lot of other investors’ $100s, and I’m going to buy the mortgages on houses all over town. And those homeowners’ payments are going to fund $106 to each of you.
But wait–it gets better. We can set this investment opportunity up to give you the lowest possible federal income tax bill. And at the same time, we’ll protect your $106 from my creditors–just in case I go broke. What’s the magic at the heart of the deal that lets us get those extra features, you ask? Simple! Our middleman.
I sell the mortgage loans to the middleman, who buys them with your money. Then the middleman gives you a piece of paper that says he’ll pay you $106 from the mortgage payments, if he can. That’s all it takes!
Well, really, it’s a teeny bit more complicated than that, but not much. There’s really two middlemen, neither human. One is a little paper entity and the other a gigantic Bailed Out Bank.
The little entity is the Trust. The Trust has no human component; it’s essentially a safe-deposit box in the heart of a vault. The Trust owns the mortgage loans for your benefit, gives you the piece of paper saying you get $106 if possible, and otherwise functions like a bank account. That is, mortgage payments are deposited into the trust and then paid out to investors according to the pieces of paper you all have.
The Bailed Out Bank is the Trustee. It’s the Trustee’s job to take care of the Trust. Which really means the Trustee’s job is to make sure you get all the money you were promised, or as close to it as possible, including managing the bank account that is the Trust. So, that’s it: one middleman to own the loans and play bank account (the Trust), and one to take care of the money (the Trustee).
What do I mean that the Trustee has to take care of the money? Just a couple of basic things–it’s not like the Trustee collects mortgage payments or anything. A company called a mortgage servicer does that, “services” the mortgages. Then the servicer gives the money to the Trust, and the Trustee dishes it out. Before any mortgage payments come in, however, the Trustee has one crucial, basic job: make sure the Trust really owns the loans I promise I’m going to sell it.
If the Trust doesn’t really own the loans, you see, our deal blows up. If the Trust doesn’t own the loans, the Trust doesn’t have a right to collect and give out the mortgage payments to you. The Trust also doesn’t have the right to foreclose on the homeowners. And any money the Trust pays you becomes subject to more tax and could be taken by my creditors. So really, my promises to give the Trust clear title to the mortgage loans are the most important promises I make to you; that’s why they’re not only in the contract, but we have the Trustee check to make sure I kept my word. With something so important, it’s like President Reagan said: Trust, but verify.
So that’s the pitch. And as long as I keep my promises in the contracts, and the Trustee double checks, it’s a good deal.
Seeing Securitization Fail
But here’s the thing: buying home mortgage loans isn’t like buying groceries. Special rules apply. Transferring ownership involves a couple steps and takes at least a few minutes. The reason it’s tricky is that historically, a lot of land was stolen from people, so the legal system developed rules to stop the theft. Since mortgage loans affect the ownership of the underlying land, the rules cover them too.
The special rules are why the Trustee has to really check out the documents I give the Trust. While it’s easy enough to do transfers correctly, failing to cross the t’s and dot the i’s invalidates the transfers. If I failed to cross those t’s and dot those i’s, and the Trustee didn’t catch me and force me to fix the problems in time, the piece of paper you hold promising you $106 is worth a whole lot less.
And any time a seller of securities–me in this story–lies to investors about something really important that destroys the value of the investment, it’s securities fraud. And what could be a more important, value-destroying lie than telling you (investors) that the Trust owns the loans when it doesn’t, because I didn’t keep my contractual promises?
Beyond the securities fraud I’d be committing by failing to give the Trust good title, I’d also create a massive problem with foreclosing. To foreclose on a loan, the Trust has to have good title. But if I didn’t transfer ownership to the Trust, the Trust and Trustee don’t have the papers needed to prove ownership. I mean, you can’t prove you have something you don’t have. That’s what “proof” is all about.
So what does a Trustee do if the Trust doesn’t have the documents needed to show clear title and foreclose, but the homeowner’s in default? Well, The Trustee (or someone working for it) has two choices: work out a deal with the homeowner, or commit fraud by fabricating the needed documents. Let’s pause a minute on the fabricating documents option, and notice just how attractive it is to the securities seller.
Fabricating the documents needed to foreclose solves two problems for the securities seller, if it gets away with it. 1) The foreclosure goes through. 2) If the seller can foreclose freely and give the money to the investors, that takes the securitizaton-fail securities fraud risk off the table, at least as far as investors (as opposed to law enforcers) goes. That’s because for investors, lying while selling securities only matters if the lies caused harm, and if the trust can get away with foreclosing, where’s the harm?
So foreclosure fraud minimizes the securities fraud liability.
But another thing happens if the Trustee (or somebody working for it) fabricates the documents and successfully forecloses. The property’s record of ownership–its chain of title–is now “clouded,” or subject to challenge. As a result of the banks’ wholesale foreclosure fraud-to-cover-up-securities-fraud, our chains of title nationwide are a mess.
Ok: that’s securitization of mortgage loans–a deal with a special structure with nice benefits, that hinges fundamentally on one thing: the person selling the loans to the trust must give the trust good, clear title to the loans. And if the securities seller didn’t give the trust clear title to the loans, that’s securitizaton fail.
As discussed, securitization fail means securities fraud and leads to foreclosure fraud. A third consequence is that somebody earlier in the process still owns a loan it thought it sold, at least as a matter of law. As a matter of accounting, perhaps the sale occurred. And that means… another mess with no obvious fix. Thanks, banks.
The only piece left to convey is scale, why we’re not talking about a few bison on the South Dakota prairie, but a pre-1870s herd. (I couldn’t find a picture of such a herd, but check out this pile of bison skulls from 1870 and you’ll get the idea.)
Multiple sources of evidence indicate that securitization fail was normal, at least during the peak bubble years. One is the testimony of Countrywide’s Linda DeMartini, corroborated by New York’s foreclosure records. Those two sources show one of the t’s to be crossed–endorsing the promissory notes–just didn’t happen, as a matter of Countrywide’s business practices. As a result, it’s very likely that every securitization of Countrywide loans failed.
Another source of evidence comes from filings in corporate bankruptcies, like this filing by Deutsche Bank in the American Mortgage Home bankruptcy. Deutsche Bank played the trustee role in 45 American Home securitizations, and at paragraph 16 of its filing, Deutsche Bank says: “…there exist missing or defective loan file documents for several billion dollars in original principal amount of the loans.” (Bold added.) Now, maybe those missing and defective documents include problems besides securitization fail; but surely securitization fail is also demonstrated. More; Deustche Bank adds that it believes other trustees have the same issues with American home documents.
A third source of evidence is simply the massive amount of fraudulent documents fabricated to “prove” a Trust could foreclose. There’s only two reasons why such documents are fabricated. One, the mortgage servicer was too lazy and cheap to get the real documents out of the vault, and two, securitization fail. I discuss both in this post. For all the reasons in this list, I think securitization fail explains most of the fraudulent documents.
A fourth source of evidence is common sense. During the height of the securitization bubble, thousands of deals were done, each containing a few thousand mortgages. Given the number of steps involved in giving the trust clear title to the mortgages and the speed with which the deals were done, the only way to do it right is to have an army of document preparers working constantly. And if the security sellers had done that, what we’d see in foreclosure courts would look very different; notes would be endorsed, assignments of mortgage would make sense.
The last pieces of evidence are two lawsuits, one filed by NY AG Schneiderman and one by DE’s Biden. In Schneiderman’s suit, he says,
“… The failure to properly transfer possession of complete mortgage files has hindered numerous foreclosure proceedings and resulted in fraudulent activities including, for example, “robo-signing.” These fraudulent activities have burdened borrowers as well as the courts with flawed foreclosure proceedings.”
“These circumstances apparently triggered widespread fraud, including BoA’s fabrication of missing documentation.”
“Indeed, the Attorney General’s own investigation revealed numerous foreclosure actions brought on BNYM’s behalf which were improperly brought against New York homeowners. A review of the records in the Bronx, New York and Westchester County Clerk’s [sic] offices reveals that BNYM failed to ensure that notes were transferred to some of the Trusts.” (all the bold in the three paragraphs is mine.)
Biden’s suit deals with the issue starting at paragraph 51. At paragraph 61, Biden says “Such industry practices have likely led to the failure to properly transfer mortgage loans on a large scale”. (bold mine)
Securitization Fail, NY & DE, The Servicer Settlement
So what does securitization fail have to do with AGs Schneiderman and Biden (beyond their lawsuits to date) and the settlement the banks and feds are pushing the states to sign by Monday? Well, to enforce a law, an attorney general must have “jurisdiction” over the claim. All the securitization trusts were either New York or Delaware trusts. So both states have jurisdiction over part of the problem, though my understanding is far more trusts are New York trusts, giving Schneiderman particularly large leverage.
And what does securitization have to do with the settlement? Well, Nevada AG Catherine Cortez Masto asked 38 critical questions about it last Friday in this letter. She sets up her question 3 with this sentence: “The state release contains a provision that prevents the State AG’s and banking regulators from seeking to invalidate past assignments or foreclosures.” If that sentence means what Tom Adams of Naked Capitalism and others believe–and again the only (tiny) hesitation is that final language isn’t out–then AGs who sign the settlement can’t address securitizaiton fail. As Yves Smith explains at that link, that produces the worst of all worlds, where everyone pays but the banks.
For a moment consider what could have been: the Justice Department and the 50 State AGs stood as a unified, enforce-the-law team as soon as this issue became known, documented the fact and scale of securitization fail, and then said to the banks: look, we can render you bankrupt by proving in court that you committed mass securities fraud (which suits investors can copy) and by proving in court that you have systematically and fraudulently fabricated evidence to cover up your securities fraud wrongfully foreclose. (Criminal RICO, anyone?)
In the face of break-the-banks liability, the Bailed Out Bankers would’ve had to say, ‘hey, what kind of deal can we cut? Please, we can cut one, can’t we?’ And the result would bear no resemblance to what’s on the table today.
Frankly, the scale of the problem and its direct and indirect impacts on virtually every American call out for a legislative solution, not a breathtakingly large and premature (because investigations aren’t over) use of prosecutorial discretion. Our nation needed our law enforcers to thoroughly document the bankers’ fraud, and then release the information to the public. We need our Congress to hold public hearings on that evidence and build an accurate and complete public record. And we needed our elected representatives to craft a legislative solution, because frankly, there’s no other way to comprehensively deal with securitization fail.
Foreclosure Fraud Will Continue The Day After The Settlement’s Signed
Ask yourself: what happens the day after the settlement is signed? Does document fraud-to-cover-up-securities-fraud-and-enable-foreclosure-fraud continue? As Mitt Romney might say, I’ll bet $10,000 it does. If it doesn’t–if the evidence manufacture simply stops–then the only way forward is to modify every loan that wasn’t successfully securitized (most loans during at least during peak bubble). Because without fabricating evidence, the securitization fail loans are essentially unsecured: there’s no way for the trust to foreclose. Only an entity up the securitization chain could enforce the mortgage, but it doesn’t want to because that means claiming the loan. And that would be suicide. (The Congressional Oversight Panel in November 2010 noted balance sheets couldn’t survive such a reversion.)
Given that reality, how can securitization fail liability be released? How can foreclosure fraud liability be released? For securitization fail reasons alone, how can any AG take this deal? Most particularly, how can AG Schneiderman?
Congress had better get busy on securitization fail, quick.
Warning: Attention Homeowners: Most judges don’t care about these issues. Some mistakenly believe you need to be a party to the securitization contracts to raise the issues. Others simply analyze the issues under the UCC and don’t really consider how the servicer presenting the note to the court came to have it, or why an endorsement has suddenly appeared on a note, or any of a number of other issues. This judicial apathy has to change.
Manufacturing evidence is obstruction of justice. Our legal system cannot operate if either side starts manufacturing evidence. There is such a thing as truth.
In our history, some Justices have had the courage to defend our Constitutional Rights. For example, they recognized that cops had little reason to respect the Fourth Amendment’s command that cops have a reasonable, fact-based belief a suspect had committed or was committing a crime before searching them or seizing them. You know, “probable cause”. And the Justices realized that the only way to rein the cops in was to prevent them using any evidence they got during an unconstitutional search, even if it meant a guilty person went free.
So in 1914 we got the Exclusionary Rule for federal officers. In 1961 the Warren Court ruled the Exclusionary Rule applied to state and local police too. Incidentally, Chief Justice Warren was a former local prosecutor, so he had experienced the right reality to understand how bad the police behavior was, how justified the rule.
Well, right now the Fifth Amdendment, which commands Due Process when depriving an American of property, is being violated every day in foreclosure courts across the land. One side, the creditor side, is fabricating evidence. They are committing fraud in court every day, and judges are letting them.
Not all judges; some deny the foreclosure on the basis of the fraud. But most. And I don’t know if anyone’s brought the 5th Amendment argument or how it turned out. Though I know how it should turn out.
If judges ruled that in order to defend the Fifth Amendment’s promise of Due Process, any attempt to foreclose using fraudulent documents (tracing the fraud back to the securitization fail or otherwise) voided the mortgage, this foreclosure problem would end. We’d have mass modifications.
Now, I know the amendments only curb state action, not private action, and the fraudulent documents are a private act. But allowing them to be used is a kind of state action. Regardless, foreclosure is generally done according to a court’s equitable powers, and a court could exercise those powers to validate the 5th Amendement.
Voiding the mortgage for fraud when the overwhelming majority of documents creditors have are fraudulent fundamentally shifts the economic incentive to modify a loan or refinance it, either way on sustainable terms. And Justices need to realize realize that judges must actively look for the fraud in every case, because defending the right to Due Process is defending our system of laws, defending the rule of law itself. Besides, most foreclosures are not contested, so judges have to actively look for fraud for the deterrent effect to kick in. And if the Justices do that, then the incentive to modify instead of foreclose becomes overwhelming.
Maybe judges will catch on. Until they do, however, you cannot count on having securitization fail mean anything in your foreclosure.
That said, if you are interested in fighting your foreclosure, you have two basic choices, and I’d urge you to pick both. First, get a good lawyer. Second, join or organize a local action group.
Regarding a good lawyer, check out my “Fight Foreclosure” page for ideas, Mandelman’s “Trusted Attorneys” or the other resources on his website. And ask your friends who they used, what the experience was like and what the outcome was.
A good lawyer may be able to use foreclosure fraud by your servicer to get you a truly sustainable modification so you can afford to keep your home. Alternatively, a good lawyer may be able to use your servicer’s fraud to delay your foreclosure long enough for you to be able to make a controlled move.
In addition, community groups, some affiliated with the Occupy movement, are organizing actions to help you stay in your home. For example, get involved at OccupyOurHomes.org. They’ve had some successes, but the movement is very new. One of its great features is that it is locally organized, so you should check it out and meet some equally conscious neighbors. Organize some actions to defend your community. Help your neighbors stay in their homes. Protect your community from vacant, rotting houses and the myriad problems they cause. Stand up to the fraudulent bankers.
But be serious about your end game. Your odds of winning the lotto are similar to your odds of getting a free house, though you might get one for years. If so, save as much as you can of that money. Even my Fifth Amendment idea doesn’t cancel the debt, it just means they can’t take your house to make you pay it, and you can discharge it in bankruptcy much more easily.
But we don’t yet live in a world where most judges have a clue, much less are wielding the 5th Amendment. And many only care that you are in default.
Bottom line: even if you could prove the securitization of your loan failed, without a good lawyer most of the time the bank will still succeed at foreclosing on you, and even with one, endgame is a good modification. Participating with a local group may also get you a modification. Either way, you have to realize, the deck’s pretty heavily stacked against you. I mean, the other side is allowed to fabricate evidence. Sorry.