Breaking Foreclosure Info: Countrywide Never Sent Mortgages to Trust

Nov 22, 2010Mike Konczal

mike-konczal-2-100The picture of fraud becomes clearer while regulatory action has stalled.

Wow. Stopforeclosurefraud finds testimony from a New Jersey bankruptcy court case indicating that Countrywide was not passing along notes as part of the securitization process:

The new allonge was signed by Sharon Mason, Vice President of Countrywide Home Loans, Inc., in the Bankruptcy Risk Litigation Management Department. Linda DeMartini, a supervisor and operational team leader for the Litigation Management Department for BAC Home Loans Servicing L.P. (“BAC Servicing”V testified that the new allonge was prepared in anticipation of this litigation, and that it was signed several weeks before the trial by Sharon Mason.

As to the location of the note, Ms. DeMartini testified that to her knowledge, the original note never left the possession of Countrywide, and that the original note appears to have been transferred to Countrywide’s foreclosure unit, as evidenced by internal FedEx tracking numbers. She also confirmed that the new allonge had not been attached or otherwise affixed to the note. She testified further that it was customary for Countrywide to maintain possession of the original note and related loan documents.

Both Yves Smith and David Dayen have write-ups of this news that you should read.

Why is this a big deal? It might be helpful to go back to the diagram we used for Part 1 of the Foreclosure Fraud for Dummies series that explained the chain of securitization.  Let's update it for the Countrywide situation. As you can see at each point, conveying and transferring the note plays a crucial part in creating these mortgage-backed securities (please click through for larger, easier to read, image):

(Thanks to Tom Adams for a discussion about this chart.)

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These are not technicalities -- these obligations come from secured credit and trust law, two fields where strict requirements are essential. We don't want confusion over conflicting claims to property, and we don't want tax-free trusts set up without the trusts doing their homework. The channels for the securitization are tax-free under a special type of law ("REMIC"), and in exchange for that the trusts have to be set up correctly from the get-go.

These laws are based on New York trust law, not congressional law. As Professor Adam Levitin noted in his testimony, between the New York trust law and the Pooling and Service Agreements there are very specific requirements for passing these notes down the chain. They are required to protect investors from malfeasance, avoid fraudulent transfer concerns, and create "bankruptcy remoteness" of that asset from the originator/sponsor.

And it appears that during the worst excesses of the mortgage bubble, the very basic rules of property transfer and record-keeping were ignored. The trust and its servicers have no standing to foreclose.

Key point: Tim Geithner and Treasury did not announce this breakthrough. The Federal Reserve did not announce this breakthrough. Even at this late stage, the actions of the trust, servicers and depositors are opaque to regulators and investors.

The only reason we know about this is from a New Jersey bankruptcy court. And it's only because of the people in the field deposing robosigners, piecing together the records, and fighting to get information about what is actually broken in the biggest piece of our stalled economy that we know any of this. Advances like this will disappear if Congress doesn't allocate the $35 million dollars it is supposed to for legal aid groups, and you can now understand why lawmakers are hoping this request dies quietly. And it also shows why Attorneys General will need to step up to the plate and take over this fight while the public needs to hold federal regulators accountable for their lack of effort.

Mike Konczal is a Fellow at the Roosevelt Institute.

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