Further, the opinions handed down by both the lower court and the SJC, did nothing to change the operation of Massachusetts legal principles, and there was no significant change in the common law, which is why the ruling is not prospective in its application, despite the request of the banks, a request which is telling of the banks concerns regarding the potential costs of undoing past foreclosures.
The ruling, should not distract from the important underlying errors in the execution of securitized mortgages which appear to be all but universal. Thus the SJC ruling, is not an end in itself, but rather is part of a means to an end, which is discovering the realities of mortgage securitization in the US and what it may indicate regarding the banks motivations is expediting foreclosure actions in recent years.
The first part of the problem is the bifurcation of the mortgage, that is to say the separation of the promissory note, from the underlying security instrument, or the mortgage. In the Ibanez case, the notes were conveyed, but improperly. The plaintiffs, in this case, the Trusts that held the securities that the loans were bundled into, never had any such conveyance of the related mortgages in addition to improperly conveyed notes. The Plaintiffs aggravated their claims in the following way:
1. By exercising the power of sale, although they were not holders of the underlying mortgage, and thus did not have proper standing to foreclose.
2. Possessing improperly conveyed notes endorsed in “blank”
3. Violating M.G.L. 244 ss. 14, by falsely indicating in their publications that they were the holders of said mortgages.
The conventional industry practice, conveniently, is to assume that the mortgage follows the note; however in Massachusetts (a Title theory state), that is not the case. In Massachusetts, where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment of the mortgage: Barnes v. Boardman, 149 Mass. 106, 114 (1889). In other cases, the assignment of the mortgage may be held to be invalid, even if the note is properly conveyed, and thus renders the debt, nonetheless unsecured. It is possible that from the banks perspective an invalid assignment of the note is the more serious concern for the following reasons:
1. Without first having proper ownership of the debt, the bank can not initiate any collection activity, let alone foreclosure.
2. Notes (ownership of the debt asset), may be subject to further contention in bankruptcy proceedings where many creditors have a vested interst in the assets of a defunct mortgage lender, particuarly since these notes are often sold in bankruptcy for a fraction of their face value.
2. The trusts that are suppose to contain the validly conveyed notes will in fact, not actually contain them (because they are not bearer paper), thus violating the representations and warranties made to investors who purchase these securities. Therefore, it is unsecured debt, and potentially, no debt at all upon which to collect payments.
3. By way of exmaple, let's say there is an 11 billion dollar portfolio up for sale in bankruptcy, and strangely the successful bid is under 100 million. Now how do you think the other creditors of the original mortgage lender who went bankrupt are going to feel after taking a rather large "hair cut" when they find out that the bankruptcy trustee may not (according to the SJC), have had authority to actually sell the assets, because they were not properly owned by the bankrupt mortgage lender in the first place. Or how will the bidder feel when they find out they paid about 100 million for secured debt, that is not really secured at all?
4. What exactly is the relationship between US Bancorp, Wells Fargo and other large banks such as Credit Suisse? Probably will make for fun bedtime reading. Wells Fargo and US Bancorp sure do pop up on a lot of SEC filings for Mortgage Backed Securities - we'll learn further below from their press releases, they have "no role in it"
5. Even if the notes obtain a valid conveyance, or confirmation of conveyance at a later date, it is still may be impossible to place them into the MBS's:
a. It will have been longer than 90 days (the typical expiry period to transfer assets into the trust)
b. If it is a foreclosure matter, the loan is in default (the PSA's do not allow for the addition of defaulted loans)
c. Any effort on the part of the trust to insert old or defaulted loans would jeopardize the trusts favorable REMIC status – thus further harming already impaired returns.
While there is no significant change in the law, other positives are likely to come from the ruling. For example, it may restore faith in the judiciary, or provide encouragement to foreclosure victims to seek proper remuneration for their trials and finally, it may provide a sound legal framework for homeowners to stop paying their mortgages (especially in Massachusetts), irrespective of their ability to pay, until their mortgage holder can guarantee clear, insurable title, we will discuss this prospect further below.
Can Securitized Mortgages really be fixed? - Critical points from Attorney General Coakley’s Amicus Curiae brief
1. If there must be a perfected interest in the mortgage (according to MA law) at the time of foreclosure, then how many foreclosures have taken place in Massachusetts with the same profile as Ibanez, and are thus invalid?
2. Clear title is important - In the statement of the case, the banks actually brought the complaint before the land court as independent actions in order to “remove a cloud on the title” – thus the banks recognize that such defects are a problem for future conveyance. All MA homeowners should be worried about the same (discussed further below).
3. To foreclose on a mortgage securing property in the commonwealth, one must be the holder of the mortgage. To be the holder of the mortgage, the bank must:
a. Be the original mortgagee
b. Be an assignee under a valid assignment of the mortgage
c. It is not sufficient to possess the mortgagor’s promissory note (bearer paper). Apparently most if not all securitized mortgages were endorsed in “blank”, in other words to the bearer.
4. The notice requirements set forth in G.L.c. 244, ss 14 unequivocally requires that the foreclosure notice must identify the present holder of the mortgage. This likely was not the case in past foreclosures in MA. For future foreclosure actions the question is can the real mortgage holder be found and will they cooperate in assigning the security interest?
5. Assignees of a mortgage must hold a written statement conveying the mortgage that satisfied the statute of Frauds or even the most basic elements of contractual requirements.
AG Coakley acknowledges that "the securitization regime was required to conform to state law prior to foreclosing, to ensure simply that legal ownership 'caught up' in order that the creditor foreclose legally in MA. The lenders, trustees and servicers could have done this, but apparently elected not to, perhaps on a 'Massive Scale' " Saying that they "could have done this" within the context of MA law is one thing, within the context of IRS tax code, or NY trust law, is another.
Critical points from the Massachusetts Supreme Court ruling
1. Executed agreements that assign pools of mortgages must include detailed schedules that specifically identifies the mortgage at issue as among those assigned. Our question is; how many did, and can they be altered under the REMIC rules?
2. There must be proof that the assignment was made by a party that itself held the mortgage.
3. In MA, where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment of the mortgage.
4. The holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage, which may be accomplished by filing an action in court and obtaining an equitable order of assignment. If the average MBS has 5,000 notes for example, then we have to assume 5000 separate actions would have to be filed in court to ensure they are truly “Mortgage Backed Securities”, and that is only if the REMIC status isn’t jeopardized by such a revelation or action.
5. In absence of a valid written assignment of a mortgage or a court order of assignment, the mortgage holder remains unchanged.
6. A post foreclosure assignment cannot be treated as a pre-foreclosure assignment simply by declaring an “effective date” that precedes the notice of sale and foreclosure.
7. Title standard 58(3) should not be misinterpreted – the Court upheld that only where an assignment is “confirmatory” of an earlier, valid assignment, made prior to the publication of notice and execution of the sale, that confirmatory assignment may be executed and recorded after the foreclosure.
Additional thoughts on the SJC ruling
The AG suggested that the ruling not be merely prospective, but rather applicable to all previous foreclosure cases in the common wealth that would be aptly affected. SJC confirmed that foreclosures by note holders, who do not posses mortgages which have been validly conveyed, were improper foreclosures, and that no future proper conveyance of the mortgage can cure the fatal defects in foreclosure that have already taken place under similar circumstances – thus the SJC agreed with AG Coakley that the ruling not be only prospective. Given what has been revealed about the securitization industry, it is likely that most if not all foreclosures in the commonwealth of MA on securitized mortgages are invalid.
The question going forward, is can Trusts which represent MBS investors, locate and properly convey the mortgages in order to proceed with future foreclosures? This course of action may present a further dilemma for the banks; either to loose REMIC status for these securities and incur tremendous back tax liabilities, and further harm investors interests (but possibly perfect the underlying securities), or accept the “unsecured” status of the debt and attempt to negotiate settlements with the debtors (formally considered mortgagees).
The American Securitization Forum – Suppressing evidence and a Red Herring to boot
Tom Deutsch, executive director of the American Securitization Forum, an industry lobbying group, said in a statement that the SJC’s decision, holds that “assignments of mortgage can be executed in blank, as long as a complete chain of transfers can be shown through the applicable deal documents.”
Let’s explore this first statement further:
1. It is true that the SJC held “Where a pool of mortgage is assigned to a securitized trust, the executed agreement that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to establish the trustee as the mortgage holder.”
2. For the SJC clearly and specifically means the written instrument “must contain the terms of the contract agreed upon – the parties, the locus…the price, and it must be signed by the party to be charged or by someone authorized to sign on his behalf.” Cousbelus v. Alexander, 315 Mass 729, 730 (1944).
Mr. Deutsch claimed that because the deal documents with the loan schedules weren’t introduced as evidence in the Ibanez and LaRace cases, “the court ruled that an otherwise valid confirmatory assignment was not sufficient to prove right to foreclose.”
That is not correct. The loan schedule was missing in one case, and insufficient in the other. As AG Coakley pointed out in her brief:
“Neither US Bank or Wells Fargo… was an assignee under a valid assignment because, at the time of the foreclosure, neither US bank nor Wells Fargo held a written statement conveying the mortgage that satisfied the statute of frauds or even the most basic of contractual requirements” (Cousbelus v. Alexander).
Given the criteria, we would be surprised to find any schedule of pooled mortgages which constitute valid assignment under MA law as described above. By focusing on an irrelevant or secondary subject Mr. Deutsch is diverting attention from the main subject – that the detail contained in the schedules of pooled mortgage loans is insuficient to establish assignment, and that there may not be any other "assignments" to speak of that can be legitimately transferred into the MBS. Because people have strong opinions about the validity of the assignments in blank, their attention is being diverted from the more important issue of the ability to find the true Mortgage holders, and if they do, the serious problem of altering the REMiC status of the MBS's. For this reason, Mr. Deutsch's comments are a Red Herring.
What the SJC actually said
“…Where an assignment is confirmatory of an earlier, valid assignment made prior to the publication of notice and execution of the sale, that confirmatory assignment may be executed and recorded after the foreclosure…”
The key word here is “valid”, and as we see from AG Coakley’s comments above, at no time where the assignments valid, either before or after the foreclosure. Entry into evidence, as Mr. Deutsch suggests has nothing to do with the validity of the assignments.
In fact, what the SJC did say regarding the plaintiffs arguments to be the holders of the mortgages is:
“…their reliance is misplaced because this proposition is contrary to G.L.c. 183, ss 21 and G.L.c. 244 ss 14 and their published claims to be the present holders of the mortgages were false.”
Despite this, Mr. Deutsche added that his group was:
“Pleased the court validated the use of the conveyance language in securitization documents as being sufficient to prove transfers of mortgages under the unique aspects of Massachusetts law.”
“The ASF is confident securitization transfers are valid and fully enforceable.”
Additional thoughts on the ASF’s curious comments
The SJC further held that “There must be proof that the assignment was made by a party that itself held the mortgage.” In the case of Ibanez, a company called Rose mortgage originated the loan and then properly assigned the mortgage to a company called “Option One”. Option one then executed an endorsement of the note in blank, making each “payable to bearer” and “negotiated by transfer alone until specifically endorsed” At this point, the note ceased to be a valid assignment under MA law (the same was done for the related mortgages). After Option One endorsed the notes in blank, it sold the mortgage to Lehman Brothers (which of course went bankrupt). Lehman Brothers then sold the mortgage, together with hundreds of other loans, to Structured Assets Securities Corporation “SASC”. SASC then sold the bundled loans to SASC Mortgage Loan Trust 2006-Z of which Plaintiff US Bank National Assoc. was the trustee.
These were distinct legal entities, the later entities created for the sake of being both discrete but also bankruptcy remote. We know that once the notes left Option One they ceased being recordable assignments. The question is which entity from that point of the initial valid assignment forward can “prove”, as per the SJC ruling, that the assignment was made by a party that itself held the mortgage? When we consider the added complication of the bankruptcy of an intermediate owner in the process (which is now commonplace in mortgage securitization)new possibilities arise. We'll have to call it something else other than a chain of title issues, perhaps "Chain of MERS" issues, since we can't legitimately call it a chain of title any longer, that would imply a public democratic system of real property rights ownership, and would be incorrect under the current system. Add in MERS secrecy regarding disclosing mortgage holders, the lack of requirement that assignments be recorded into MERS at all, and the matter becomes far more interesting.
US Bancorp - Suppressing evidence with a non-sequitur argument
“This judgment has no financial impact on U.S. Bancorp”Teri Charest, a spokeswoman for the Minneapolis-based bank, said in an e-mailed statement. “Our role in this case is solely as trustee concerning a mortgage owned by a securitization trust” and the bank had no responsibility for transferring the loans.”
Presenting only the part of a piece of evidence that supports your claim while ignoring the part that contradicts your claim is hardly fair.
If the judgment has no financial impact on U.S. Bancorp, should we expect there will be no more Investor, Title Insurance, or Pension Fund Lawsuits? Don’t trustee’s have fiduciary responsibilities that they get paid for. If they get paid, but don’t perform, don’t they have responsibility?
Us Bancorp had no responsibility for transferring the loans - got it. How about the Mortgages? Isn’t it a “Mortgage Backed Security” US Bancorp is the trustee for? Wasn’t there some mention of Mortgages in the Ibanez ruling? Otherwise, the investors could have just as well bought, say, debt in Madoff Securities or some other unsecured debt.
Also, good to know that US Bancorp’s role was only as “trustee”. Last time we checked, the root of the word “trustee” was, well, “Trust”. How should the investors trustthat the mortgages actually accompany the notes, or to ensure that the notes and the mortgages were properly conveyed, or that the PSA’s are met, or that the reps. and warranties are met, or to ensure foreclosures are handled properly on behalf of the interested parties, including investors and insurers. Didn’t US Bancorp effectuate the subject wrongful foreclosure in Ibanez, isn’t there liability there? Don't trust perform various compliance tests?
We are further confounded by Ms. Charest comment“Our role in this case is solely as trustee concerning a mortgage owned by a securitization trust” But didn’t the SJC just rule that the “securitization trust” did not in fact own the mortgage? According to Ms. Charest, US banks’ failed at their sole responsibility as “trustee”. It’s not often you find this kind of self-incriminating honesty in corporate America.
Wells Fargo - Denying the Antecedent with a Straw Man
Oddly, Wells Forgo felt compelled to defend the Mortgage loan industry, although they have “no role” in it… Rarely are banks so selfless.
Wells Fargo said in a statement that, as trustee, it had no role in originating or servicing the loans. They went on to say:
“Wells Fargo believes the court’s ruling does not prevent foreclosures on loans in securitizations,” it said. “The court simply set forth a standard legal process that mortgage servicers must follow in Massachusetts.”
Wells Fargo’s statement has presented a caricature of the SJC ruling so that it is easy to refute.
1. The court was never considering whether or not to allow foreclosures on securitized loans, that was not the issue before the court.
2. The court did not “set forth a standard legal process” they affirmed a long standing one, and indeed went on to rebuke the banks disregard for that long standing legal precedent.
3. The “legal process” that the court upheld and recognized, negates the ability to foreclose in most if not all cases of securitized mortgages, given the realities of the securitization industries practices, which were nicely revealed, at the national level, thanks to the plaintiffs appellate action.
The first part of wells Fargo’s statement is also a deductive fallacy. Let’s analyze the implications of this statement a little more carefully:
Wells Fargo’s argument is as follows:
a. If the SJC’s ruling “does not prevent foreclosures on loans in securitizations”, foreclosures proceedings on securitized mortgages can proceed.
b. The SJC did not prevent foreclosures on loans in securitizations
c. Therefore foreclosures proceedings on securitized mortgages can proceed.
Both premises A and B above are true, but the conclusion C is still false. First, the cause and effect relationship in the initial premise A is misrepresented. Further, there are other reasons why foreclosures may not be able to proceed on securitized mortgages besides the SJC ruling. The Argument overlooks and oversimplifies alternative explanations, such as the inability to properly convey notes into trust that are closed, the fact that the mortgages do not automatically follow the note, and therefore, the loans in the securitizations are not actually securitized by mortgages, etc.
American Home Mortgage Servicing – the “long shot” approach
“The SJC’s ruling effectively rejected many grounds for the lower court’s decisions, and generally represents a good result for the mortgage-loan securitization industry,”Coppell, Texas-based American Home Mortgage Servicing Inc., the mortgage servicer on the trusts, said in a statement. “The SJC’s decision confirms that the securitization processes currently in place in the secondary mortgage market are sound, and can and do validly transfer mortgages for foreclosure purpose.”
The fallacy used by American Home Mortgage is used somewhat less often, and it little know - it is the “insanity” fallacy, and requires no further explanation.
Are judges expected to clarify business matters as well? and other Important questions for the American People
Ibanezdid little more than reaffirm a long standing Massachusetts case law, it is not a commentary on the likely business outcome of a badly corrupted securitizationmarket, the Judges are not business people, they are not financiers, and were not asked to comment on the future of these businesses
1. If banks are bidding on and purchasing properties for which they owned the note, as was the case in Ibanez, who are they really buying them? Are banks now in the real estate business? And if so, why?
2. Unlike short sales and modifications, are REO’s held on the balance sheet of the bank at unimpaired values? aka “mark-to-fantasy” accounting. If so, is this the explanation for the banks sudden interest in REO? How else can you avoid writing down the value of your assets? If you're a home owner in America, the value of your real estate has gone down by 40-50% over the last few years, but if your a bank, the good news is, you've still got 2006 pricing on your books.
3. Is the deficiency between the note and the sale price at auction paid through insurance? If so, who is the recipient of these funds? Are there relationships in these agreements that constitute a conflict of interest?
4. Are mortgage insurers being gauged when sale prices are artificially low? In Ibanez, as in so many other auctions, no other bidders showed up to the auction? Is the deficiency delta increased through the banks preference for foreclosure over modification, thus harming the financial interests of the mortgage insurer and their shareholders?
5. If the investors are taking a loss because of a defaulted loan, isn’t it a conflict of interest if the servicer simultaneously takes action to profit from foreclosure? Isn't it a further conflict of interest if the servicer, who makes far greater profits from foreclosures than conventional servicing, is also owned by the bank that underwrote and profited from the creation of the MBS in the first place? As underwriter of these securities, where they not responsible then for:
a. The attributes of the securitized loans
b. Ensuring strict underwritting guidlines to select the loans sold into the transaction?
c. Conduct extensive due diligence on the securitized loans to ensure compliance with strict guidlines.
6. Can servicers really claim they represent the alleged owners of the mortgages, i.e. the bond investors in the MBS’s, when the investors are suing them for misrepresentation?
7. If the trust represent “Mortgage Back Securities”, but the mortgages are not validly assigned, then what are they representing? If servicers are subject to the Fair Debt Collection Practices Act, as ordinary debt collectors, than they would be subject to all sorts of transparency, and above all the ability of the debtors to simply refuse to work with them, and instead elect to work directly with the owner of the debt, whose interest are far more aligned with the barrow than those of the servicer, if the true owner of the debt can be found that is. The servicers would have no recourse to this refusal to cooperate, and under the FDCPA, FCRA, and FTC rules would not even be able to report the matter to credit reporting agencies.
Banks may be efficient after all, and perhaps we’re just not giving them enough credit. If you can position yourself as a senior, secured debt holder, and take back equity in a security without a bankruptcy trustee or any judicial oversight for that matter, it’s a pretty efficient way to build your balance sheet. We could also come up with a new moniker for this business practice; how about…hmm…. Stealing.
Important points for Home Owners in Massachusetts
We are not lawyers, and this should not be taken as legal advice, it is business advice. If you live in Massachusetts and your mortgage has been securitized, or if you have purchased a foreclosure property, we think it would be wise to consider suspending your mortgage payments if you haven't already. We provided fundamental reasons for our position in our November post here as well as some simple advice on the proper way to go about doing it, we further hope that the Ibanez decision and this article provide more specific justification for such a decision. It may be naive to think that the bank is a friend of the borrower, or has the borrowers best financial interest in mind, or will have any interest in pointing out the following:
1. If you are not sure about what we have written above, watch what the banks do next, as has been said "actions speak louder than words". If Ibanez really does not present a problem for the foreclosure process and clear title in general in Massachusetts, as the ASF and their bank owners have suggested, than we should expect to see banks showing up at auctions all over Massachusettestobid on title to the properties that secured their own defaulted loans as they have done in the past - it will be business as usual, there is no more efficient way to build equity than to steal it, particularly when recently alter accounting rules allow for unimpaired assets.
2. However, if the banks are not showing up to bid in Massachusetts, what do you think that says about clear title and their real feelings about the soundness of chain of titles concerns in general in Massachusetts?
3. If banks and their lawyers are worried about a "cloud on title", which will make a title impossible to convey or insure, shouldn't you be? Especially if you happen to have purchased a foreclosure property. Even if you haven't purchased a foreclosure property, wouldn't a cursory review of the chain of title (if you can even get it) to your property likely identify the possibility of multiple parties who will have conflicting interests in a potential lien on your title? We believe this is the case in Ibanez, as well as many other MA titles we've examined.
4. The banks have been worried about clear title for a long time, which is why they brought the original action before the land court in the Ibanez case. Although they had serious doubts about clear title, it did not stop them from collecting mortgage payments from their customers. The customers make payments under the assumption they will one day have clear, fee simple title to their properties. Are you sure you will get clear, fee simple title to your property if you continue to make payments under the current regime? With Ibanez, we now have confirmation that many, if not most, Massachusetts home owners, in fact, can not get clear title to the properties they are making payments on. In other words, they are renters who are paying a premium to feel like owners.
5. But you might be saying to yourself, wait, there was title insurance in place. Our response is an insurance company would never not pay a claim right? After all, Insurance companies are beacons of business ethics. Just think of the medical insurance business, where peoples lives are on the line, do they always pay? A great many medical insurance policy holders thought they would, right up until the time they were refused treatment because their insurance companies wouldn't cover it. Now in mortgage insurance, we're not talking about a life, we're talking about a peice of paper, a title to a property. If the insurance companies have already stopped agreeing to pay on policies to their large bank customers (who weild very big sticks), and instead have sued them, how do you think they will treat you?
6. If insurance companies are refusing coverage on pre-Ibanez titles, do you think they will insure your title in a post-Ibanez transaction?
7. Problems such as this have many dimensions. There is a legal dimension (the court and competent lawyers opine), a theoretical or academic one (which is why many professors have chimed in), and since money is changing hands, there certainly is a business component (not too many businessss folks have chimed in, because they're far more likely to have an interest in the revenue streams from MBS's).
In business, you should always do what you say you are going to do, written contract or not - it's called integrity. However, if you find out that the counter party you were involved with in your business dealings was not honest, and that you made a business decision based on a false premises or representation, then all bets are off - the deal needs to be looked at again. You have not harmed your integrity by taking such action. You have acted wisely to protect your financial interest and the financial interests of your familys' future. Do not worry about what other people think or say, make a rational decision based on the best evidence you can find.
If you are a Massachusetts resident and have been foreclosed on, it is worth reviewing the documents. Similar thoughts to ours were posted in this article last September. Improper notice as defined by the SJC ruling above (i.e. Bank advertised that they held the mortgage, and the related power of sale when they in fact did not, irrespective of later confirmatory transfers) invalidates the foreclosure. Furthermore, if you were foreclosed on by a bank that did not have a properly assigned note or mortgage at the time of the foreclosure, it also invalidates the foreclosure as per the SJC ruling above. These simple criteria likely include the majority of foreclosure actions in Massachusetts over recent years, and we imagine would also apply in title theory states that have similar statues and case law to those of Massachusetts.
With the SJC ruling it should be easy enough to find a fee-contingent attorney (it really should be fee contingent given the clarity of the SJC ruling) to take appropriate action to recover what is fairly owed throug the banks abuse of process, particularly in states such as Massachusettes where barrows did not have the added protections of any type of judicial review prior to foreclosure.
You might think the banks have all the leverage in the world, the big secret is it's actually the opposite. Who do you think has more leverage, those who make payment on 7 trillion in securitized mortgage debt, or those who collect the payments? Who do you think is more worried? You probably make your income from a wage, they make their income from an investment, you wouldn't beleive how quickly investors can become insecure, that's why your servicer doesn't want you talking to them directly, their brokers, and make a handsome living at it. Our thinking is the guy who writes the check has the leverage. After all, if you owe the bank $100,000 dollars you've got a creditor, If you owe them 7,000,000,000,000.00 we're pretty sure you've got a partner.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.