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.

A story at Huffington Post by Shahien Narisipour and Arthur Delaney, about how a couple lost their home as a result of the Administration’s HAMP program, actually serves to illustrate a broader issue, namely, how servicers’ dubious fees can put mortgage borrowers hopelessly under water.

It is critical to understand that it is not uncommon for borrowers to lose their homes thanks to servicer errors and abuses. And this bad practice has policy implications. Whenever we discuss “fix the housing mess” solutions that involve loss sharing, like giving viable borrowers a deep principal mod, some readers react that “deadbeat borrowers” are getting a free ride, and often will contend that they were irresponsible and need to take their medicine.

This black/white picture is simplistic and misleading. Yes, there were people who borrowed too much in the bubble. Guess what? Those people tended to have been subprime borrowers and the resets on teaser loans had pretty much concluded by the end of 2008. As a result, they would have been relatively early to hit the wall. Many have already lost their house.

Another cohort could have made the payments if they hadn’t lost their job or suffered a reduction in hours. And remember how soft this job market it is, so even people who had savings that would have been enough to carry themselves through a typical period of job search are coming up short. These individuals are collateral damage of the global financial crisis, but they too often are depicted as having been reckless rather than unlucky

But the third cohort is most often overlooked and most troubling, which is victims of servicer abuses. This problem is very much underdiagnosed because the servicer is judge, jury, and executioner as far as its charges are concerned. Borrowers find it a pitched battle to get the detailed payment records from servicers, even with a lawyer’s help. Even then, the statements are usually incomprehensible. Attorneys have told me they typically have to hire a forensic accountant both to get to the bottom of the mess and to serve as an expert witness.

Given how expensive it is to fight this sort of case on the real issue, the borrower’s belief that the servicer has overcharged him, many of these cases are instead fought on the simpler grounds of standing. That feeds the perception that borrowers are taking advantage of bank errors, rather than having legitimate grounds for opposing a foreclosure.

So the best we can go by is estimates by attorneys that actually handle these cases. Remember, most people who really cannot afford their house will not put up a fight. Nevertheless, Diane Thompson, Counsel for the National Consumer Law Center said in testimony before the Senate Banking Committee last November that in 50% of the cases she handled, the foreclosure was the result of a servicer driven default. I’ve had attorneys who’ve handled hundreds of cases put the percentage even higher.

Now some readers no doubt may be skeptical that servicer screw-ups or venality can have that sort of impact, so let’s look at the Michigan couple highlighted in Huffington Post as a case study.

The background is a bit ugly. The Garwoods had missed one payment, but this apparently was not unsalvageable; the husband’s roofing business was seasonal. Their servicer, JP Morgan Chase, contacted them and encouraged them to enroll in HAMP.

The HAMP trial mod, which was supposed to last three months, instead ran nine months and lowered their payments by about $500 a month. When they were ultimately refused a permanent mod (despite hearing encouraging noises from the servicer in the meantime), they were presented with a bill for the reversal of the reduction, plus fees, of $12,000.

Stop a second and do the math. Let’s be unduly uncharitable to JP Morgan and assume “about $500″ means $540. $540 x 9 is $4,860. That means the fees and charges were $7,140, or nearly $800 a month.

How can charges like that be legitimate? Answer: they almost assuredly aren’t. The payments were reduced as a result of a trial mod, so any late fees would be improper. Thus the only legitimate charges would be additional interest, perhaps at a penalty rate. So tell me how you have interest charges of nearly 400% on an annualized basis on the overdue amount and call them permissible? I guarantee there is not a shred of paperwork anywhere that can support this level of interest charge, either with the investor or with the borrower.

But as we indicated, it’s a hopelessly uphill battle to fight servicers on this issue. The Garwoods threw in the towel and stopped paying last spring. One can dispute whether that was the best move, but even if they have paid the normal mortgage amount due in full each month, it is almost a certainty that JP Morgan would have credited the payments, contrary to the pooling and servicing agreement, to fees first, assuring that the current amount due would be insufficient and thus not arresting the compounding charges. In other words, unless the Garwoods acceded to the bank’s bogus charges and paid the $12,000 in full, there was no way out of compounding fee hell.

We used to call that level of charges loan sharking and would send people to jail for it. It has now become standard operating procedure in banking and no one bats an eye.

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