October 14, 2010
Joshua Rosner
646/652-6207
jrosner-at-graham-fisher.com

~~~

Several new-media have quoted an early story on our October 12th note which suggested we saw risks that origination flaws would allow investors to challenge securitizations on $1.3 trillion of mortgages. This is incorrect. The story read: “potential paperwork errors on some of the $1.34 trillion of securitized home mortgages may give investors an opening to challenge the legality of deals, threatening to unnerve financial markets”.

Based on the large scale operational failures in foreclosure processing and the number of foreclosures in which borrowers have been able to challenge a mortgage trusts ability to foreclose, it appears that some trustees are at risk of large scale failures to properly assign the notes to the trust.

Before anyone can offer a reasonable estimate of the number of mortgages or trusts at risk, there needs to be a broad assessment of operational controls that oversaw the moving of pools of mortgages from originators to trusts for the benefit of MBS investors. We believe that the assignment of notes in “blank” name, which was a standard practice, materially increased the risks of shoddy assignments.

We are not suggesting a Lehman style crisis will necessarily occur. We are suggesting
that if the investigation of front-end documentation practices uncovers assignment
failures in any scale resembling the back-end foreclosure processing failures, the scale of uncertainty could create a market response reminiscent of that Lehman period.

It is our belief that, given the black box nature of the process and the former white-hot origination market, some trustees may not have properly transferred notes to the trusts. If not properly transferred, the “true sale” of mortgages to the trusts that issued mortgagebacked securities would be in question. If this proves to have occurred we believe the Trustee, may have liability.

To understand the increased risks posed from “blank” assignments, it is worth
understanding the arcane process by which mortgages are transferred from a
securitization sponsor to the trust. As we stated in our comment of October 12th:

“Nearly all Pooling and Servicing Agreements require that “On the Closing Date, the Purchaser will assign to the Trustee pursuant to the Pooling and Servicing Agreement all of its right, title and interest in and to the Mortgage Loans and its rights under this Agreement (to the extent set forth in Section 15), and the Trustee shall succeed to such right, title and interest in and to the Mortgage Loans and the Purchaser’s rights under this Agreement (to the extent set forth in Section 15)”. Also, an Assignment of Mortgage must accompany each note and this almost never happens. We believe nearly every single loan transferred was transferred to the Trust in “blank” name.

“In blank name” is a concern to us because of the increased risks of documentation failure that it brings. When a note is assigned “in blank name” it apparently becomes a “bearer instrument”. As a result the requirements of transfer become significantly more cumbersome and at risk of failure. Because “blank name” makes this a bearer instrument, a receipt of delivery and acceptance from the originator to the sponsor, a receipt of delivery and acceptance from the sponsor to the depositor, and a receipt of delivery and acceptance from the depositor to the trustee are all required. Moreover, the custodian must have all of these documents and the original notes before the loan is considered to be owned by the trust. It is the responsibility of the trustee to make sure that all documentation has been properly delivered to the custodian and, it is our belief and understanding, that is would be the trustees that would be on the hook for failing in that capacity.

There have been a large numbers of foreclosure proceedings where, because of improper assignments, the trust has been unable to demonstrate the right to foreclose. It is thus that we raised concern about the transfer “in blank name”. We do believe it likely the rush to move large volumes of loans may well have resulted in operational failures in the “true sale” process by some selling firms and trustees. Were this “missing assignment” problem, which we are witnessing in individual foreclosure proceedings, to be found to have resulted from widespread failure of issuers and trusts to properly transfer rights there would be appear to be a strong legal basis for the calling into question securitizations. As example, consider an investor who bought an MBS security in 2007 and sold that MBS at a loss in the market meltdown of 2008. As a result of the information coming out during the “foreclosure moratoria”, the investor might now witness the trusts inability to
foreclose on a defaulted borrower because it is found not to have properly perfected their mortgage note claim. Substantively, the original investor who bought and took a loss on a “mortgage backed” security would have taken a loss on a “mortgage backed” that did not properly own the mortgages it claimed to be backed by. It is reasonable to believe that this investor would consider suit against the trustee to recoup losses.

Unfortunately, the rising uncertainty is only increased by the current reality that real
estate, trust and many of the related tax issues are currently addressed as state rather than federal issues. Other than offering to act as referee, short of a politically charged battle that may result from asserting interstate commerce authorities, there appears no current opportunity for the federal government to create a uniform solution.

Category: Bailouts, Credit, Derivatives, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

27 Responses to “Why “Blank Name” Matters and Trustee Obligations”

  1. AGORACOM says:

    Josh, great job at going into the details. I note you’ve done a great job at qualifying many of your statements to avoid causing a panic – but your last paragraph says it all:

    “Unfortunately, the rising uncertainty is only increased by the current reality that real
    estate, trust and many of the related tax issues are currently addressed as state rather than federal issues. Other than offering to act as referee, short of a politically charged battle that may result from asserting interstate commerce authorities, there appears no current opportunity for the federal government to create a uniform solution.”

    In short, there is no wand for the Feds to waive.

    As such, I don’t see how Wall Street can get out of this mess. Home owners are not going to make their payments, while investors (who are no doubt salivating at a chance to get at Wall Street) will be filing suits against trustees.

    Check mate. Hold on to your hats, I think this is going to get really ugly. With no wand for the Feds to waive it will be long and ugly.

    Regards,
    George

  2. obsvr-1 says:

    Does anyone know who are all the trustees and where are all of these trusts ?

    Were the trusts set up by the banks that underwrote the MBS and CDOs ?

    How do the Cayman and other offshore entities fit into this, I recall seeing a lot of Cayman in the AIG CDO disclosures ?

  3. ReadingFundamental says:

    “We do believe it likely the rush to move large volumes of loans may well have resulted in operational failures in the “true sale” process by some selling firms and trustees.”

    I have to disagree with this – and I have some experience in loan securitizations. It was the desire to REDUCE COSTS by not paying experienced loan people and attorneys to do the critical tasks that caused these failures to properly transfer the mortgages and notes into the trusts.

    The financial institutions over the last 20 years have taken the Wal-Mart approach to business – cut costs to the BONE. The only trouble is, you can do that if you are selling manufactured goods, but you better not be solely focused on cost if you make your money as a SERVICE PROVIDER or your service quality will suffer and you will take on legal risk as a result of not properly providing the service.

    I’m perfectly happy to see these chickens coming home to roost.

  4. hammerandtong2001 says:

    Well, there it is.

    .

  5. NormanB says:

    BR: Its obvious that you are infatuated with the mortgage mess but except for being able to sell the stocks short of the scroundrels (are you even doing that?) it means nothing now to investors. The Feds will print whatever amont of money they need to in order to cover this stuff up. Its old, old, old news. Get off of it. Its not making you any money to ruminate over it. Go short or buy. We are at an inflection point.

  6. Mannwich says:

    @ReadingFundamental: I would add that this is a result of these firms that skewed towards being way too top-heavy in terms of staffing levels and pay. Too many chiefs making too much money for doing far too little in reality, and way too many indians doing the important (but far less glamorous and notable) “blocking and tackling” operational duties that eventually cause companies to blow up due to this loss of expertise and institutional memory. Stuff just ends up going into a “black hole’ never to be seen again over the years. The chickens have come home to roost.

  7. Mannwich says:

    …..way too FEW indians, I should say.

  8. AHodge says:

    Hi Josh
    I forgive you for that dinner argument
    where you insisted mortgage securitization woes were mostly lending standard and down payment deterioration? But you da man, there at the 90′s creation. I just say it wasnt so good even then, just untested. and i grant it got worse last decade

    who do i short? any publically tradable? whats the diff between trust and trustee? Are these “trusts” another version of SIVs where no one ever figured who “owned.” who got paid the interest spread? Every trader needs a good securitization lawyer these days?
    thanks Andrew

  9. AHodge says:

    And is this all non fannie freddie stuff? or do they have their own trustee issues? or maybe they dont have issues, just deep pockets?

  10. batmando says:

    @ AGORACOM
    “In short, there is no wand for the Feds to waive.
    As such, I don’t see how Wall Street can get out of this mess. ”

    try this on for size…,
    after the introductory paragraph below, SyntheticAssets cites previous financial industry end-runs in which massive illegal practices created tbtf situations which were then legalized ex post facto.

    Moral Hazard and the Foreclosure Crisis
    “An important fact has been omitted from the ongoing discussion of the widespread failure to follow legal procedure not only in foreclosures, but also in forming and managing mortgage backed securities: This is just another example of the consequences of moral hazard that is deeply engrained in the way our financial markets work. The financial industry functions on the assumption that contracts and activities that are either illegal or unenforceable under current law will – as long as they involve significant bank losses or liabilities – always be made legal retroactively.”

  11. Chris says:

    Could someone explain to a foreigner (german) what the problem with the foreclosures/ mortages is? I followed it a bit and I don’t get it. Are there just signatures missing? Or is it such a mess that nobody knows who owns what?

  12. Wyatt_Earl says:

    I used to work with – not for – a subprime lender, and noted that it was always a fire drill to find all the loan files on a securitization date. They knew they had to deliver all the files, but it was a challenge finding them all. First they would search everyone’s desk, where they usually found several files. They eventually hit upon the idea of paying a bounty on the files. When they offered $25 per file, the rest of then came in.

    And on all subsequent securitizations, there were a whole lot more missing files, most of which got found after the bounty was posted.

    I’ve seen them have notes that had no bank name (“I promise to pay ______ the sum of . . .”) and I’ve seen them try to foreclose on loans that had rescinded (ie. not made).

  13. LSS: yon’ Rosner is one of the Good Ones..

  14. rktbrkr says:

    We need the mother of all forensic audits just to assess the magnitude of the problem. The GAO needs to contract a fast track statistical sample audit of all mortgages issued during the boom years and assess whether the documentation in the files meets the legal requirements of the jurisdictions.Contract the work out to major CPA firms at GAO direction with monthly interim reports and a final report in 6 months. The sample would include all types of mortgages issued in that time frame and follow them thru the python…current, delinquent, in foreclosure process and foreclosed. All inclusive pool of mortgages to sample from , all jurisdictions, lenders etc. Confirmation of mortgage/note holders

    The review has to be independent and non-partisan, internal bank reviews cannot be relied upon (and since these same big banks control the FED it cannot be relied on either).

    We need to know the magnitude and nature of the pwobwems before we can start addressing them.

    Is MERS regulated? They are private and have no employees? Was it structured so it couldn’t be rgulated?

  15. Soylent Green Is People says:

    I too like AGORACOM was struck by the last sentence

    “Other than offering to act as referee, short of a politically charged battle that may result from asserting interstate commerce authorities, there appears no current opportunity for the federal government to create a uniform solution.”

    Honestly, since when did the lack of appearance of opportunity stop the Feds from doing anything? Theoretical “laws” allowing all sorts of roughshod are interjected into the market system every day by the Feds. Some make sense, most don’t constitutionally speaking. (Zero change in behaviour from the last administration to this one BTW. I’m not being partisan) The dictum remains: if they say there isn’t a federal moratorium in the works, rest assured there is.

    My .02c

    Soylent Green Is People.

  16. Well. I’d say we’re doing a pretty good job of slamming that barn door shut after the cows have already fled.

    Now that you point all these securitization issues out, what exactly, might be the cure?

    Should we just rewind the clock to about 1995, and have a “do over”? That’s about when the securitization train left the station.

    There are at least two principals, one in contract and one in real property law that are implicated here, and in the foreclosure imbroglio, that I haven’t seen considered.

    So far as foreclosures go, the essence of the contract is–as I would tell borrowers at the closing table–”If you don’t pay, you don’t stay”. They got it. And I’m pretty sure none figured that a robo-signed affidavit would void that general understanding.

    The other is that time cures all title problems. People must assert a claim to property within a specified time–in my state it’s ten years–else they’re barred forever from doing so. So even if a 1999 mortgage depended upon a fraudulent affidavit, it would be too late now to assert the claim.

    Of course, neither of these principals have any meaning anymore. Since about 2008, the federal government decided that contracts, particularly residential mortgage and note contracts, would mean whatever it wanted them to mean. So this latest salvo by the state attorneys general could turn into quite a federalism issue.

    In any event, the residential real estate market is now teetering on complete and utter collapse, from which all the king’s horse and men won’t be able to put it back together again.

    Investment advice: Buy gold, guns and agricultural commodities. Quit paying your mortgage now, if you have one. Let them try and kick you out. If you don’t have a mortgage, go and get one and refuse to pay it back. Get out of the stock markets completely. Own what you need to live, except your house, and just live in it for free.

  17. “So this latest salvo by the state attorneys general could turn into quite a federalism issue…”

    Curm,

    for Times like these, and, really, all other Times, too..there’s

    http://www.tenthamendmentcenter.com/the-10th-amendment-movement/

    http://www.usconstitution.net/xconst_Am10.html

  18. Marc P says:

    BR,

    Could you direct us to the current figures of how much of these MBS are still owned by the banks? Past quantities of MBS were purchased by the Federal Reserve. Isn’t the number something like $1.3 trillion? Even larger quantities have been refinanced by Freddie Mac and Fannie Mae. How much of the problem is still in the hands of the banks, and can you break that down between the primary dealers and the rest?

  19. ReadingFundamental says:

    I agree with Batmando. After the election we are going to see congress (given all the senators’ and reps’ dependency on campaign contributions from the financial services sector) pass a law that will override state property and trust laws, and the IRS code. My only uncertainty is as to the method. Will they give loan servicers and trustees x months to get documents executed to transfer all those notes and mortgages into those REMICs the way they should have been, or rule that they just don’t have to do it.

    If they give them x months to do all those transfers, they’ll have to authorize the FDIC or some entity to execute assignments on behalf of institutions that no longer exist. And of course this will cost the finl services companies a lot of money in wages, recording fees, legal fees, etc. Since the transfers will happen will after the deadline the IRS rules put on REMICS, the tax code will have to be amended.

    The finl firms will prefer to get a law that those assets are “deemed” owned by those REMICS and MERS is to be recognized as a party with standing, etc. etc.

    Some commentators are saying it won’t happen becauase the American people won’t tolerate it. Well I’m sorry to say that this won’t matter – the entities that fund campaigns will have the power and the little people of this country will be told this is necessary to avoid the deadbeats getting free houses and the mortgage industry shutting down and there being no way to get home loans in the future.

    Those are all lies but I expect to hear them.

  20. Marc P says:

    @ rktbrkr:

    I have to disagree with you that “we need the mother of all forensic audits just to assess the magnitude problem.” I think there is a risk in these situations for the American public to say “Oh my God! This is a huge problem. What are we going to do?” Something magical happens in that sentiment. The problem and the responsibility for fixing it magically transfers from the banks to “we” meaning we the people.

    We the people don’t need to do anything. We the people set up a very simple, very transparent, and virtually error-free system of recording titles, mortgages and doing foreclosures that has worked extremely efficiently and well for over a century. We the people don’t have a problem. Those wishing to foreclose have a very simple task: they need to gather or finally complete the transfer documentation, record the appropriate documents, pay the tiny county recording fees, and then the last entity that holds the promissory note and mortgage has the right to foreclose. Simple as that.

    Yes, there will be some people living in houses without making payments and effectively getting a free ride. Yes, there may be some houses that stand empty and therefore get vandalized. These are risks that lenders consciously take. The lenders that were cavalier with their risk by being cavalier with their documentation may now pay the price. Simple as that.

  21. Mysticdog says:

    The exciting part will be when we find out the same mortgage is backing multiple investment vehicles at seperate companies. We already have cases of people being foreclosed upon by companies that used to own the mortgage but sold it to another company. There is no way that there won’t be multiple sales of the same mortgage if the paperwork and chain of custody is this screwed up.

    Of course, reselling the same mortgage is just good leveraging, amiright?

    As for those who don’t care who gets to kick the owners out, as long as the owners are kicked… you guys are idiots. letting people stay in homes is a lot better for the property and the neighbors property than having the owners kicked than having multiple banks fight over the property for years to settle who the real owner is. Empty houses devalue a whole neighborhood. And letting any bank kick people without proving they have a right to kick people is just obviously bad business. Banks have proven themselves more than capable of running out any slack you give them, and with more money and power they do a lot more damage when they reach the end of it.

  22. carping demon says:

    I don’t know about the Fed, Congress or the Administration being able to simply “fix” this, retroactively or not. All the RE laws, insurance laws, trust regulations, etc., are state laws, regs, etc. If the federal government tried to step on (or over) all these state laws, it could have a big “states rights” fight on its hands, even if the usual suspects don’t feel like making a states rights fuss. It would be simple enough for any interested party (with enough money) to go back through supreme court cases and find rulings that this, that, or the other issue was a matter for the states to decide and the federal government had no standing.

    As much as it seems to bother people to see others get free rent, that is a very minor irritant compared to how big this problem could (should?) turn out to be. We only manage to tolerate living together in such great numbers by developing an accepted body of law, and if we start kicking that body around there will be unanticipated consequences which we haven’t even imagined yet.

  23. AGORACOM says:

    @batmando You definitely raise a concern that all of us (outside Wall Street) have.

    I think (hope) this will be different for the following reasons:

    1. Wall Street has been able to game the system before because those instances dealt with complicated securities that few understood.

    2. This matter deals with people’s homes. Individual citizens will draw the line and fight any compromise on this issue. Question … Is there enough time to make this a political issue prior to mid-term elections.

    3. This matter deals with customers/investors from overseas that have been burned by Wall Street and are itching at the chance to take Wall Street securitizers down.

    4. This matter deals with State issues. In addition to jurisdiction issues, many states are suffering as a result of Wall Street actions. As such, I believe they will fight any compromise on this issue.

    Would love to hear any feedback from the rest of you as to whether these points have any merit, or whether I’m suffering from “this is different” syndrome.

    Best,
    George

  24. [...] are there, they’ll have to prove they’re there in the right order. It’s the same ‘blank name’ idea picked up by analyst Joshua [...]

  25. formerlawyer says:

    To Curmudgeon:

    “So far as foreclosures go, the essence of the contract is–as I would tell borrowers at the closing table–”If you don’t pay, you don’t stay”. They got it. And I’m pretty sure none figured that a robo-signed affidavit would void that general understanding.

    The other is that time cures all title problems. People must assert a claim to property within a specified time–in my state it’s ten years–else they’re barred forever from doing so. So even if a 1999 mortgage depended upon a fraudulent affidavit, it would be too late now to assert the claim.”

    I would agree with the first part, after all an Affidavit is only a substitute for witness testimony – any documents must be substantiated by witness testimony. If the document is missing the bank can rely upon a business practice exception to the hearsay rule, the exceptions to the Statute of Frauds (some memo, part performance) etc. All of these are acceptable in Court albeit with greater costs and legal fees. Remember in recourse jurisdictions the homeowner will get tagged with those costs and in any case the banks will just up their exorbitant fees for services. The banks never pay – they just pass it along to the consumer. That alone is a justification for concern.

    As to the second part, at least in my former jurisdiction they have developed a “renewal by acceptance” – that is if you kept paying your 1995 mortgage up until say 2008, the bar to actions (limitation period ) would not start for 10 years or until some time in 2018.

  26. Trusteenot says:

    These foreclosures are blatantly illegal. The lenders failed to comply with the law. They pre-sold these loans to their crony partners and figured – why should we pay recordation fees & taxes like the bottom-feeder pawns.

    So they took their NOTES on world tours – earning ka-billions in profits becoming rock-star-rich in the Wall Street World of Disney… but they forgot something – they forgot their passport (Deed of Trust) that was supposed to accumulate all those pretty signatures & stamps as that NOTE traveled… Damn-it I hate when that happens…

    For most other citizens this would be TAX EVASION – since that’s WHY they failed to properly RECORD the damn documents. In fact, if I fail to pay my property taxes – they foreclose. Sounds like its now the homeowners turn to foreclose on these crony tax-evading lenders… THAT WOULD FUNNY AS HELL… That would put a few skid-marks in a bankers underwear..! Filing False Affidavits – back-dating assignments and/or defrauding material evidence ultimately to illegally seize private property of a citizen should give folks concern. Doing all the above and denying those citizens Due Process to quash any illegal bad-habits – might be more reason for concern…

    One might even question – why would such HUGELY wealthy corporations get their shorts all pulled in a bunch over a few sloppy document procedures – especially non-paying deadbeats…?

    Could it be that the LOANS that were sold to those alleged deadbeats were also illegal? After-all, practically every lawsuit between the investors & lenders is about Mortgage Fraud…

    Could it be that when Countrywide admittedly sold 142-Billion dollars worth of Mortgages to borrowers KNOWING those borrowers could not repay?
    Could it be that they did so using deception & trickery by changing their loan docs from conventional to non-conventional – automatically when these applicants were rejected from their normal Underwriting program then was transferred automatically to another Underwriting Program that put these borrowers in NINA or SISA mortgage – without the borrowers every knowing it. In fact, via deposition they used 1.25% interest rates and some times 40-yr amortization schedules – but gave these families 30-yr paper so they never knew and in fact to this day probably don’t know. Using Countrywide’s own data that came to about 965-thousand families that will without a doubt be tossed to the street – and those folks have no idea their loans were rigged.

    These foreclosures are illegal because the loans are NOT secured by the properties. When these lenders failed to follow recordation – pay those pesky fees & taxes – they also made that loan unsecured. Therefore, that property is no longer the collateral for the loan. Is that the homeowner’s fault? I don’t think so.

    If the Note is not secured, it cannot be securitized. If it cannot be securitized, me thinks dim investors will need some malox… No security – No investy – somebody’s ass is hanging out and it is NOT those homeowners…
    Then comes the Mortgage Insurance collected on LOANS sold to borrower that COULD NOT REPAY… that sounds like insurance fraud to me. But what about the securities insurance – default insurance and multiple other insurances paid after those loans were dumped in the cessPools…?

    Hmm, I guess that’s why it didn’t matter if the borrower could pay or not – they were insured 100% no matter what happened… what’s the ole saying about seems too good to be true… me thinks things are just starting to heat up. Watch what happens when 3-million borrowers find out they’ve been burned and the Lenders were paid multiple times for their houses – while these families are living in gov projects.
    Keep the Powder Dry

  27. USNDC says:

    Can anyone help me understand.

    When sign closing documents … your note &mortgage clearly identify the lender by name.

    How then … are assignments made in “blank name” ?

    There must be a step I am missing.

    Can anyone explain how this would happen ?