Bank Investigations Cheat Sheet: ProPublica

by Marian Wang, ProPublica – May 13, 2010

Here’s our attempt to lay out exactly what’s known about which banks are being investigated by whom and for what. We’re going to keep updating this page, so please send usstories or details we’ve missed. Related: Covering the Bank Investigations: A Cautionary Tale

  What has been reported What the bank has said
 
Citigroup
Citing “a person familiar with the matter,” The Wall Street Journal has reported that Citigroup is under “early-stage criminal scrutiny” by the Department of Justice. Also citing unnamed sources, Fox Business reported on May 12 that the SEC has an active civil investigation into Citigroup and has subpoenaed the firm, but has not issued any Wells notices. A report on May 12th by the Journal cited unnamed sources saying that the Department of Justice is scrutinizing a few CDO deals that Morgan Stanley bet against–but which were underwritten by Citigroup and UBS. Neither the SEC nor the Justice Department have confirmed these reports.

Citing two anonymous sources, The New York Times has reported that New York Attorney General Andrew Cuomo is investigating eight banks to determine whether they misled rating agencies in order to get higher ratings for their mortgage-related products; Citigroup has been named as one of the banks. Subpoenas were issued on May 12, according to the Times and the Dow Jones Newswires, both of which relied on anonymous sourcing for their reports.

Citigroup has declined to comment to us and other outlets.

Credit Agricole
Credit Agricole has also been named as one of the banks that New York Attorney General Andrew Cuomo is investigating separately. Credit Agricole did not immediately respond to the Times’ request for comment and has not yet responded to ours.

Credit Suisse
Credit Suisse has also been named as one of the banks that New York Attorney General Andrew Cuomo is investigating. Credit Suisse declined to comment to the Times about the New York attorney general’s investigation.

Deutsche Bank
Citing “a person familiar with the matter,” The Wall Street Journal has reported that Deutsche Bank is under “early-stage criminal scrutiny” by the Department of Justice. Also citing unnamed sources, Fox Business reported on May 12 that the SEC has an active civil investigation into Deutsche and has subpoenaed the firm, but has not issued any Wells notices. Neither agency has confirmed these reports.

Deutsche Bank has also been named as one of the banks that New York Attorney General Andrew Cuomo is investigating separately.

Deutsche Bank declined to comment to Fox, the Journal, and the Times about possible investigations.

Goldman Sachs
The SEC has brought a civil fraud lawsuit against Goldman, alleging that the investment bank made “materially misleading statements and omissions” when it allowed a hedge fund to help create and bet against a CDO, called Abacus, without disclosing the hedge fund’s role to investors.

The Wall Street Journal, citing “people familiar with the probe,” reported in April that the Justice Department has been conducting a criminal investigation into Goldman’s CDO dealings following a referral from the SEC. Neither agency has confirmed this, but the AP, citing another unnamed source, has reported the same thing. Since then, many news organizations–including the The New York TimesABC News and the Washington Post–have also reported on the criminal probe, citing unnamed sources. No charges have been brought.

Goldman Sachs has also been named as one of the banks that New York Attorney General Andrew Cuomo is investigating separately.

Goldman called the SEC’s accusations “unfounded in law and fact.

After the reports of a criminal investigation, a Goldman Sachs spokesman declined to confirm that the bank had been contacted by the DOJ but also told several news outlets that “given the recent focus on the firm, we’re not surprised by the report of an inquiry. We would cooperate fully with any request for information.”

The bank has declined to comment to us on the New York attorney general’s investigation.

 
JP Morgan Chase
Citing “a person familiar with the matter,” The Wall Street Journal has also reported that JPMorgan Chase has received civil subpoenas from the SEC and is under “early-stage criminal scrutiny” by the Department of Justice. Neither the SEC nor the Justice Department has confirmed these reports. A JPMorgan spokesman told the Journal that the bank “hasn’t been contacted” by federal prosecutors and isn’t aware of a criminal investigation.

Merrill Lynch (now part of Bank of America)
Merrill has not been named in any SEC investigations. But as we pointed out, a lawsuit brought by a Dutch bank asserts that Merrill Lynch did a CDO deal that was “precisely” like Goldman’s. The SEC has declined to comment on whether it is investigating the deal.

Merrill Lynch has also been named as one of the banks that New York Attorney General Andrew Cuomo is investigating.

Merrill has said its CDO deal was not like Goldman’s, calling Goldman’s Abacus deal an “entirely different transaction.”

The bank did not immediately return the Times’ request for comment about the investigation by Coumo, but when we called and asked, a spokesman from Bank of America, which merged with Merrill, said, “We are cooperating with the attorney general’s office on this matter.”


Morgan Stanley
Citing “people familiar with the matter,” The Wall Street Journal reported on May 12 that the Justice Department has been conducting a criminal investigation into Morgan Stanley’s CDO dealings, including its role in helping design and betting against two sets of CDOs from 2006 known as Jackson and Buchanan. The Justice Department declined to comment. No charges have been brought, and according to the Journal, the probe is “at a preliminary stage.” A Morgan Stanley spokeswoman said the bank had “no knowledge of a Justice Department investigation into these transactions.” The Journal reported that the SEC has subpoenaed Morgan Stanley on several occasions, but the bank says it has received no Wells notices, which would indicate pending SEC charges.

Morgan Stanley has also been named as one of the banks that New York Attorney General Andrew Cuomo is investigating.

A Morgan Stanley spokeswoman said on May 12that the firm has “not been contacted by the Justice Department about the transactions being raised by The Wall Street Journal, and we have no knowledge of a Justice Department investigation into these transactions.”

The investment bank declined to comment to the Times about the Coumo’s investigation.


UBS
Citing “a person familiar with the matter,” The Wall Street Journal reported that UBS has received civil subpoenas from the SEC and is under “early-stage criminal scrutiny” by the Department of Justice. In a report on May 12, the Journal reported that the Justice Department is scrutinizing a few CDO deals that Morgan Stanley helped design and bet against–but which were marketed by Citigroup and UBS. Neither the SEC nor the Justice Department has confirmed these reports. The firm has not disclosed that it has gotten any Wells notices.

UBS has also been named as one of the banks New York Attorney General Andrew Cuomo is investigating.

A UBS spokesman has declined to comment on any of the investigations.

Moooove Over SLACKERS!! NY AG CUOMO probing 8 banks over securities

AP Source: NY AG probing 8 banks over securities

NEW YORK — The New York attorney general has launched an investigation into eight banks to determine whether they misled ratings agencies about mortgage securities, according to a person familiar with the investigation.

finance-20100513-US.Wall.Street.InvestigationAttorney General Andrew Cuomo is trying to figure out if banks provided the agencies with false information in order to get better ratings on the risky securities, said the person, who spoke on condition of anonymity because the investigation has not been made public.

Cuomo’s office is investigating Goldman Sachs Group Inc., Morgan Stanley, UBS AG, Citigroup Inc., Credit Suisse, Deutsche Bank, Credit Agricole and Merrill Lynch, which is now part of Bank of America Corp.

Representatives from Goldman Sachs, Citigroup and Credit Agricole declined to comment. Others were not immediately available comment.

During the housing boom, Wall Street banks often packaged pools of risky subprime mortgages together. The securities were then typically given top-notch ratings and investors purchased them, in part, because of their high ratings.

The ratings, given out by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, are used as a guide for investors to judge how risky an investment might be.

As the housing market collapsed and more customers fell behind on repaying their mortgages, the securities began to fail.

The securities have been widely blamed for exacerbating the credit crisis and costing investors and the banks themselves billions of dollars in losses. The ratings agencies have come under fire for having given such high ratings to securities that soured.

The attorney general’s probe comes as federal regulators are investigating whether some of the banks misled investors when marketing and selling the securities and other investments that were tied to mortgages.

The Securities and Exchange Commission charged Goldman Sachs with fraud over its packaging of mortgage securities. Goldman is facing a separate criminal investigation into the same securities. Goldman has denied the charges and plans to defend itself.

Earlier this week it was reported that federal prosecutors are investigating whether Morgan Stanley misled investors about its role in a pair of $200 million derivatives whose performance was tied to mortgage-backed securities.

The increased scrutiny over how banks managed, packaged and portrayed mortgage securities and derivatives comes as Congress discusses a major overhaul of financial regulations. Politicians have said an overhaul would add more transparency to investments and trading.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Homeowners strike back at banks: The Daily Tribune

“None of the named defendants have the right or authority to foreclose under (state law) or by contractual right,” he says in the lawsuit.

Published: Tuesday, May 11, 2010

By Jameson Cook, Daily Tribune Staff Writer

Ziyad Kased, left, and May Brikho, both of the Michigan Loan Compliance Advisory Group in Troy, talk to client Mahir “Mark” Salmo, 47, of Sterling Heights, one of 88 plaintiffs in two lawsuits in Oakland and Macomb counties alleging deceptive lending practices against more than two dozen banks. (Craig Gaffield/Daily Tribune)

Lawsuits filed in maneuver to try to stop foreclosure, recover losses from alleged overpayments, improper approval.

About 90 homeowners in Oakland and Macomb counties have accused more than two dozen banks of deceptive lending and other wrongdoing by approving loans far exceeding the plaintiffs’ ability to pay and charging excessive fees, among other allegations.

The accusations are levied in two lawsuits filed in each county’s circuit court within the past two weeks through the Troy-based Michigan Loan Compliance Advisory Group Inc., created to help homeowners in trouble with their mortgages. A third lawsuit with about 10 plaintiffs is expected to be filed in Wayne County Circuit Court this week.

The lawsuits represent an emerging tactic nationwide for struggling homeowners in their attempt to fight off potential foreclosure and gain relief on stifling mortgages from some of the country’s largest banks.

The plaintiffs’ representatives say the banks benefited from federal bailout money while few homeowners are getting help through federal loan modification programs.

“They (the plaintiffs) are victims of deceptive lending. They just want to save their homes,” said May Brikho, senior consultant at Michigan Loan Compliance. “They have tried to reach out to the banks, but the banks just don’t care.”

“The banks created these problems. They should’ve known better. These were all subprime loans. The banks knew they weren’t going to last.”

She noted the ubiquitous effect of the housing crisis. “These are problems that affect everybody.”

Of four banks contacted Thursday, Citimortgage and Bank of America banks indicated they had not been served with one or both lawsuits, so declined comment. Wells Fargo and Chase banks did not respond to a media inquiry.

Joe Bosogno, who operates a similar organization to Michigan Loan Compliance in New Jersey, blames mortgage brokers who worked for banks and mortgage companies for inflating applicants’ income so the mortgages could be sold as an investment device. The sale of subprime loans as investment devices contributed to the nation’s economic collapse.

“This (deceptive lending) was going on all over the country,” Bosogno said. “A number of attorneys are stepping up right now and doing aggregate lawsuits. It’s become a nightmare for the banks.”

Michigan Loan Compliance’s attorney, Ziyad Kased, in the lawsuits calls the banks’ actions “intentional and malicious,” and says the plaintiffs “have suffered substantial economic losses, loss of title and slander of title to the credit rating.”

The lenders “and their underwriters of such loans intentionally deceived the mortgagors by conspiring to promote unaffordable mortgages by companies that had direct ties to investment banks that profited from promoting and selling such debt instruments to innocent investors at everyone’s expense,” Kased said.

The loans depicted in the lawsuits range from $100,000 to $388,000 in Macomb and $87,000 to $809,000 in Oakland, with the bulk ranging from about $150,000 to $350,000.

None of the 88 plaintiffs representing 78 loans in the two counties have yet lost their homes and all are trying to prevent foreclosure. The majority of plaintiffs in Macomb currently reside in homes in Sterling Heights, Warren and Shelby Township. A majority of the Oakland plaintiffs live in West Bloomfield, Commerce Township and Farmington Hills.

The plaintiffs, who obtained the loans between 1995 and 2008, are still making payments despite their struggles.

“We advise our clients to continue to make their payments, but it’s their choice,” Brikho said.

A majority of the plaintiffs emigrated here from the Middle East, and some don’t speak English. Brikho said that while the banks may have taken advantage of that situation, it is only a secondary issue, as many of the plaintiffs are U.S. born.

Michigan Loan Compliance charges clients a fee for services. The organization is also using the courts to help other clients already in a pre-foreclosure fight losing their homes, Brikho said.

Kased said he expects the banks will try to get the cases moved to federal court, where he said bank lawyers believe they can receive better treatment and “drag it out” via legal maneuvers. Kased said he will oppose the transfer. He said he believes the cases should remain in each county since each region’s real estate market differs.

Most of the plaintiffs had their incomes inflated by a substantial amount, Kased said. The industry standard for debt to income ratio is 31 to 38 percent. The ratios of the plaintiffs far exceed that range, going from 68 percent to 714 percent, with most being between 100 and 200 percent in Macomb, and 36 percent to more than 1,000 percent in Oakland, where the differences range wider, several below 100 percent and several above 400 percent, according to the lawsuit.

In many cases, the lender or broker added income of a borrower’s family member who was not part of the loan and/or failed to learn of underreported expenses, Brikho said.

The borrower’s financial situation in most cases has worsened since then, due to job loss or reduction, she said.

One of the plaintiffs is Mahir “Mark” Salmo, 47, of Sterling Heights, and his wife, Thaira. They are suing PNC Bank for the $100,000 loan they received in 1997 before PNC acquired National City Bank.

The bank OK’d Salmo’s loan based on him earning nearly $4,000 per month, he said. In fact, he was earning $1,218 per month, he said.

“They asked me a few personal questions and I answered them,” he said. “I didn’t think I would get it. I couldn’t believe when I got it a couple of days later.”

Salmo in 2003 was given a $250,000 line of credit based only on his high credit score and his home being appraised at $415,000, he said.

He used the money to buy two businesses — a Tubby’s shop in Oak Park and a Wireless Communications store in Sterling Heights. The businesses closed, and Salmo said he lost $300,000.

“I lost both of them because the economy went down,” he said. “I had high rent and couldn’t keep up. I tried to work the landlord, but they wouldn’t budge. Now I have nothing. Everything I have worked for, for 35 years, is gone.”

He is now saddled with an approximately $1,000 monthly payment on the original loan and $600 per month for the equity loan, which is interest-only.

His home value has dropped significantly. He owes $30,000 on the original loan and $230,000 on the second loan.

“I should never have gotten that money,” he said of the second loan. “It’s like a bad dream.”

He said it hurts him most that he can’t financially help his mother, a homeowner who also is a plaintiff.

Salmo is thankful that his wife and three children aged 21 to 24 are working and supporting him, allowing him to make payments.

Salmo, a Chaldean, has lived in the United States for 35 years and said he still loves America despite his problems.

“This is the greatest country in the world,” he said.

Salmo’s interest-only loan is an example of how the banks committed homeowners to mortgages they eventually wouldn’t be able to honor; the real estate bubble that was bound to burst, Sosogno said.

Bosogno said a worse option given to some homeowners, including at least one in the Macomb lawsuit, was “negative amortization” mortgages in which the balance actually increases despite payments.

On top of the original loans, 22 plaintiffs in the Macomb case and 26 in the Oakland case obtained second loans that also were awarded deceptively, the lawsuit says.

The lawsuits ask the judges to make the mortgages “null and void.” Kased argues that the courts have determined that the mortgages should not have been assigned, so the mortgage note holders “in reality own nothing.”

“None of the named defendants have the right or authority to foreclose under (state law) or by contractual right,” he says in the lawsuit.

The plaintiffs allege the banks charged “outrageous” fees for origination, loan discount, appraisal, document preparation, broker processing, lender underwriting and yield to premium, “to name a few,” the lawsuit says. APPRAISAL FRAUD??

The plaintiffs, according to the lawsuit, “were never advised of the split charges and excess interest rate differentials split between the broker and the original lender, they were not informed of various costs that were overinflated as shown on the HUD settlement statements.”

The plaintiffs also weren’t told details of variable rate loans, the lawsuit says.

In years after the mortgage was executed, the defendants failed to respond to the “qualified written request” complaint as required by law to do so, the lawsuit says.

The lawsuit seeks compensatory damages for actual loses and exemplary damages for experiences such as mental anguish and humiliation.

The Macomb case was assigned to Judge John Foster and the Oakland case was assigned to Judge Colleen O’Brien.

Securitization – A Primer “FORENSIC LOAN AUDIT”

The Broken Chain

May 10th, 2010 •  ImplodeMeterBlog

Most people have heard the term “securitization” in media reports about the Housing Crisis. Some even know that securitization involved the selling of mortgage loans to Wall Street. But beyond that, most people have no clue as to what Securitization really is.

Securitization is the process whereby loans were sold to Wall Street and then sold to investors as bonds. It is a process that is complicated, and filled with legal issues. This article will attempt to simplify the understanding of this process. It is outside the scope of the writing to describe Securitization in complex detail, the “ins and outs”, and the myriad details involved. It would only serve to confuse the layman, and to create misunderstandings. Those who understand the process, please keep this in mind. I only want this to serve as a basic Primer.

History

Securitization has been involved in mortgage loans for decades. It started in rudimentary form in 1938 with the creation of Fannie Mae, to help with the Housing Crisis in the Depression and to stimulate home purchasing. At that time, government funds were used, and Fannie Mae was kept on the government “balance sheet”.

By 1968, Fannie Mae was becoming a large budgetary item. The Johnson Administration took Fannie Mae and turned it into a “shareholder-owned” company, which removed it from the Federal Budget. Freddie Mac was created at this same time to be competitive with Fannie Mae.

By the 1980’s, Fannie and Freddie had become major players in the mortgage industry. Other entities had taken notice and in 1990, Long Beach Savings introduced the first “privately securitized” deal for $70 million, executed through Greenwich Capital. It was so successful that other lenders took immediate interest.

In 1993, Fannie Mae, Freddie Mac, Bank of America and numerous other lenders “commissioned” a study to determine if private securitization could be effectively accomplished and the best methods to pursue for effectiveness. In 1995, the study was completed, which laid out the road map, and at the same time, identified a method for controlling costs associated with recordings and assignments and for identifying ownership of the loans. Thus was born MERS, the Mortgage Electronic Registration Systems. By the end of 1996, MERS was fully up and running, but not in systemic use.

In 1997, Long Beach Savings “split” apart and the key players went off in different directions. Ameriquest/Argent was the direct result of this split. Later, other entities like New Century and Option One were born from the former Long Beach Savings personnel.

By 1998, Private Securitization was beginning to gain popularity, but the collapse of Long Term Capital in Sep 2008 saw the securitization effort delayed, due to a “mini-financing” crisis. However, the repeal of Glass Steagall in 1999 restarted the efforts. (Glass Steagall prevented Commercial Banks and Investment Banks from conducting the same types of business. The repeal allowed commercial banks to also conduct investment banking and vice versa.)

Countrywide, Indymac and other commercial banks began to create investment operations for the purpose of Securitization, while the Wall Street investment banks undertook actions in reverse. This led to the” Securitization Boom” starting in 2000 and peaking in 2005-2006.

In 2000, the “Dot Com Bubble” burst as well. The people who made money from this boom had already taken their money out and had it sitting in banks and mutual fund investments. When 9-11 occurred, the Fed started dropping interest rates, directly affecting these assets. Wall Street came to the “rescue” offering Mortgage Backed Securities with what was promoted to be great “Return on Investments” with little risk This led the way to the current crisis. (There is much more to this part of the story, but for the sake of simplicity, I shall not cover that in this article.)

The Process

The actual process of securitizing a loan involved the following steps. To keep it simple, we shall assume that a Warehouse Line of Credit provided by a Wall Street firm was used to fund the loan.

• The Wall Street entity “pre-sold” the loans. This meant that parties were found who would buy the loans, and usually fronted the money to the Wall Street firm, though often, the firm would use their “own” money.

• Wall Street would then contract lenders to find the loans and fund them through a Warehouse Line of Credit.

• The borrower needed a loan and went to a broker. The broker did the paperwork and took the loan to the lender who approved the loan.

• The lender funded that loan and many others, through the Warehouse Line of Credit. Other lenders with Warehouse Lines would do the same.

• A “Sponsor” was named for the securitization transaction. The Sponsor would “collect” all the necessary loans and “bundle” them together in one large pool of loans. The loans would then be “sold” to the “Depositor”.

• The purpose of the Depositor was to “deposit” the loans into the “Issuing Entity” or “Trust”, after “segmenting” the loans into various “tranches” or slices of loans, which would make up the different parts of the pool. During this period of time, the loan tranches would be “rated” for quality, and ratings such as AAA were assigned each tranche.

• Once the “Issuing Entity” or “Trust” took possession of the loans which were now segmented into the tranches, the loans were ready to “sell” to the different entities that had already spoken for them. The loans were sold as “Certificates” or “Bonds” known as Mortgage Backed Securities. These were then resold to Investors.

• Incredibly, these Certificates and Bonds were often again “broken up” and resold in smaller portions in values. These were known as Credit Default Obligations. Sometimes, these were broken up again and sold in smaller amounts.

The purpose of the Sponsor and the Depositor was to comply with REMIC and other Tax Code provisions. To achieve certain Tax Benefits, there had to be at least “Two True Sales” of each loan to another entity before the Notes were sold as Certificates. The “True Sales” were supposed to be to the Sponsor, and then the Depositor. Arguably, the Sponsor and Depositor corporations were nothing more than “sham” corporations, to assist in “sham” sales.

For a “true sale”, there must be an offer and acceptance, with the transfer of the Deed and Note and consideration. When the Notes are sold, first to the Sponsor, and next to the Depositor, there is no evidence of any actual money changing hands. Nor were the Note and Deed transferred between these parties by recordings or any other method. One could reasonably argue that these were “sham sales”.

(Note: This is a VERY simplified version of the process, but it gives the general idea. Depending upon the originating lender, it could change to some degree. The purpose of such a convoluted process was so that the entities selling the bonds could become a “bankruptcy remote” vehicle, protecting lenders and Wall Street from harm, and also creating a “Tax Favorable” investment entity known as an REIMC. An explanation of this process would be cumbersome at this time.)

MERS

As described, each Securitized Loan has purportedly been transferred two to three times at a minimum. However, no Assignment of Beneficiary was ever recorded when the transfers took place. That was the purpose of MERS.

The Deeds would be kept in the name of MERS as “Nominee for the Beneficiary”. This allowed MERS to “pretend” to be the Beneficiary and avoid the expenses of recording Assignments at each transfer, usually about $30 per recording. MERS “hid” these transactions behind a “steel curtain” that would have made the 70’s Pittsburg Steelers proud. Even today, it is virtually impossible for most people to find out who the “Issuing Entity” is for a Note and loan that was purportedly placed into a Trust.

Prior to MERS, any transfer of a Note and Deed needed to be recorded in the County of the property as a public record. This was to allow notice of true ownership and to establish a “priority of liens”. MERS circumvented this procedure and obscured the ability of anyone to determine the legal owner of a property.

MERS records are confidential and limited to viewing only by “members” of MERS. To further worsen the situation, MERS “restricts” membership to only “approved parties”. A person or firm can only become a member after a lengthy application, and an “interview”. Unless you are a lender, servicer, or other party that MERS will accept, your application will be turned down because MERS does not want you to have access to this information for litigation purposes.

Pooling and Servicing Agreement and Document Delivery

The Pooling and Servicing Agreement and other related documents for securitization cover all aspects of the transaction. It identifies the parties involved, how the loans are obtained, payment distributions, credit enhancements and other issues. For our purposes, we shall just review the issues regarding the delivery of the documents. The following is from a Goldman Sachs Agreement for GSAMP Trust 2007-NC1. This was a group of New Century loans that were securitized through Goldman Sachs.

From the Agreement:

Delivery of Mortgage Loan Documents

In connection with the sale, transfer and assignment of each mortgage loan to the issuing entity, the depositor will cause to be delivered to the custodian, on or before the closing date, the following documents with respect to each mortgage loan, which documents constitute the mortgage file:

(a) the original mortgage note, endorsed without recourse in blank by the last endorsee, including all intervening endorsements showing a complete chain of endorsement from the originator to the last endorsee (except for no more than 1.00% of the mortgage loans for which there is a lost note affidavit and a copy of the mortgage note);

(d) the originals of any intervening mortgage assignment(s), showing a complete chain of assignment from the originator of the related mortgage loan to the last endorsee or, in certain limited circumstances, (i) a copy of the intervening mortgage assignment together with an officer’s certificate of the responsible party (or certified by the title company, escrow agent or closing attorney) stating that of such intervening mortgage assignment has been dispatched for recordation and the original intervening mortgage assignment or a copy of such intervening mortgage assignment certified by the appropriate public recording office will be promptly delivered upon receipt by responsible party, or (ii) a copy of the intervening mortgage assignment certified by the appropriate public recording office to be a true and complete copy of the recorded original;

(e) the original mortgage assignment in recordable form, which, if acceptable for recording in the relevant jurisdiction, may be included in a blanket assignment or assignments, of each mortgage from the last endorsee in blank;

The Problem

If one reviews sections (a), (d) and (e) with care, an important issue stands out. The Agreement calls for a complete “Chain of Assignment” of the Deed, and a complete “Chain of Endorsement” of the Note. Furthermore, section (e) suggests that there might be mortgage assignments that have not been recorded. This is a problem that litigators are beginning to address so as to argue “Legal Standing”.

There is no recorded and perfected Chain of Assignments, nor is there a Chain of Endorsements in any Securitized Loan, no assignment history that goes from the lender, to the Sponsor, to the Depositor, and lastly, to the Trust, as required by the PSA. Any Assignment of the Deed to the Trust will almost always occur after a Notice of Default is filed and the Assignment is made from the lender or MERS to the Trust. This is done to “establish” Beneficiary Rights in the mind of the Trust. It also tries to unite the Note and the Deed for Legal Standing to foreclosure.

Since the Assignment has occurred AFTER the Notice of Default, and the Assignment is from the originating lender or MERS, there is an unperfected Chain of Assignment. Can this make the Notice of Default lawful? Some attorneys in California are arguing that it is not lawful, and the results of such arguments are mixed, dependent upon the Court and the judge’s perspective. Most often, the Court will rule that since the Non-Judicial Foreclosure Statutes are “exhaustive”, the assignment issues are immaterial. Some Bankruptcy Court judges are beginning to consider this a ‘defect” in legal standing and are reacting accordingly.

The Note has been endorsed in blank, usually with only one endorsement on the Note, or an Allonge, and there is no Chain of Endorsement representing the different entities involved. This turns the Note into a “Bearer Note”. Anyone in possession is arguably entitled to payment under Commercial Code. But if the Deed is not perfected, can the Note Holder foreclose without turning to Judicial Foreclosure methods? This will be the next area that Courts in California will have to consider. Likely, it will occur in the Bankruptcy Courts, and then slowly come into the Trial Courts, after appeals are heard.

The Allonge could present another issue. Under different Statutes and case law, an Allonge must be permanently attached to the Note. This usually means that the Allonge is stapled to the Note, or affixed in some other manner. If the Allonge is not permanently affixed, it poses issues regarding Legal Standing and the ability to foreclose as well.

When preparing to argue Allonge and Note endorsement issues, you are not likely to have access to originals of either document. Courts have tended to rule that the originals are not necessary to prove Legal Standing, especially in California. However, a copy of the Note, especially if it shows only one endorsement when there should be two or more endorsements may offer some Legal Standing questions. An Allonge that is not attached could offer the same. This has been shown, at least to the satisfaction of one Bankruptcy Court, by the copies provided showing no evidence of staple marks in the copy.

Summary

Hopefully, this article has served to explain in relatively simply detail the history of Securitization, the process, and how it was instrumental in events leading up to the Mortgage Crisis. It has also tried to present in limited detail some issues regarding Legal Standing so that the non-attorney can begin to understand the legal issues that may be present with regards to Securitization.

There is much more to Securitization than what I have presented. Much is immaterial to the layman attempting to understand the process. Some aspects, as the payment streams to the different buyers of the Certificates and Bonds are so complex that years from now, people will still be trying to make sense of it.

The Underwriters of the Tranches, I have deliberately avoided writing about. It was not necessary to present for an understanding of how the loans were securitized. Underwriting would be more applicable to the understanding of how the Certificates and Bonds were presented to Investors for purchase. These topics would likely not be of use in present homeowner litigation, but will attain importance in Investor lawsuits.

My next writing will pertain to the Pooling and Servicing Agreement and other related documents, and will reveal why this document needs to be presented in litigation, beyond just proving legal standing. The PSA will tie the complete loan transaction, from origination to funding to Securitization, into a concise understanding of why these loans were doomed to fail, and the Housing Crisis becoming inevitable.