NY Times: Morgenson — Guess What Got Lost in the Loan Pool?


Guess What Got Lost in the Loan Pool?


Published: February 28, 2009

WE are all learning, to our deep distress, how the perpetual pursuit of profits drove so many of the bad decisions that financial institutions made during the mortgage mania.

But while investors tally the losses that were generated by loose lending so far, the impact of another lax practice is only beginning to be seen. That is the big banks’ minimalist approach to meeting legal requirements — bookkeeping matters, really — when pooling thousands of loans into securitization trusts.

Stated simply, the notes that underlie mortgages placed in securitization trusts must be assigned to those trusts soon after the firms create them. And any transfers of these notes must also be recorded.

But this seems not to have been a priority with many big banks. The result is that bankruptcy judges are finding that institutions claiming to hold the notes that back specific mortgages often cannot prove it.

On Feb. 11, a circuit court judge in Miami-Dade County in Florida set aside a judgment against Ana L. Fernandez, a borrower whose home had been foreclosed and repurchased on Jan. 21 by Chevy Chase Bank, the institution claiming to hold the note. But the bank had been unable to produce evidence that the original lender had assigned the note, which was in the amount of $225,000, to Chevy Chase.

With the sale set aside, Ms. Fernandez remains in the home. “We believe this loan was never assigned,” said Ray Garcia, the lawyer in Miami who represented the borrower. Now, he said, it is up to whoever can produce the underlying note to litigate the case. The statute of limitations on such a matter runs for five years, he said.

A spokeswoman for Capital One, which is in the process of acquiring Chevy Chase, did not return a phone call on Friday seeking comment.

Mr. Garcia has another case in which a borrower tried to sell his home but could not because the note underlying a $60,000 second mortgage cannot be found. The statute of limitations on the matter will expire in October, he said, and if the note holder has not come forward by then, the borrower will be free of his obligation on the second mortgage.

No one knows how many loans went into securitization trusts with defective documentation. But as messes go, this one has, ahem, potential. According to Inside Mortgage Finance, some eight million nonprime mortgages were put into securities pools in 2005 and 2006 and sold to investors. The value of these loans was $797 billion in 2005 and $815 billion in 2006.

If notes underlying even some of these mortgages were improperly assigned or lost, that will surely complicate pending legislation intended to allow bankruptcy judges to modify mortgage terms for troubled borrowers. A so-called cram-down provision in the law would let judges reduce the size of a loan, forcing whoever holds the security interest in it to take a loss.

But if the holder of the note is in doubt, how can these loans be modified?

Bookkeeping is such a bore, especially when there are billions to be made shoveling loans into trusts like coal into the Titanic’s boilers. You can imagine the thought process: Assigning notes takes time and costs money, why bother? Who’s going to ask for proof of ownership of these notes anyhow?

But as the Fernandez case and others indicate, bankruptcy judges across the country are increasingly asking these pesky questions. Two judges in California — one in state court, another in federal court — issued temporary restraining orders last month stopping foreclosures because proper documentation was not produced by lenders or their representatives. And in another California case, a borrower’s lawyer was awarded $8,800 in attorney’s fees relating to costs spent litigating against a lender that could not prove it had the right to foreclose.

California cases are especially interesting because foreclosures in that state can be conducted without the oversight of a judge. Borrowers who do not have a lawyer representing them can be turned out of their homes in four months.

Samuel L. Bufford, a federal bankruptcy judge in Los Angeles since 1985, has overseen some 100,000 bankruptcy cases. He said that in previous years, he rarely asked for documentation in a foreclosure case but that problems encountered in mortgage securitizations have made him become more demanding.

In a recent case, Judge Bufford said, he asked a lender to produce the original of the note and it turned out to be different from the copy that had been previously submitted to the court. The original had been assigned to a bank that had then transferred it to Freddie Mac, the judge explained. “They had no clue what happened after that,” he said. “Now somebody’s got to go find that note.”

“My guess is it’s because in the secondary mortgage market they have been sloppy,” Judge Bufford added. “The people who put the deals together get paid for the deals, but they don’t get paid for the paperwork.”

A small but spirited group of consumer lawyers has argued for years that the process of pooling residential mortgages into securities was so haphazard that proper documentation of the loans was never made in many cases. Leading the brigade is April Charney, a foreclosure lawyer at Jacksonville Legal Aid in Florida; she now trains consumer lawyers around the country to litigate these cases.

Depending on the documentation defect, lawyers say, investors in the trust could try to force the institution that sold the loan to the trust to buy it back. Many of these institutions would be unable to do so, however, because they are defunct. In the meantime, when judges are not persuaded that the documentation is proper, troubled borrowers can remain in their homes even if they are delinquent.

THE woes brought on by sloppy bookkeeping in securitizations will be on the agenda at the American Bankruptcy Institute’s annual spring meeting on April 3. An article titled “Where’s the Note, Who’s the Holder,” co-written by Judge Bufford and R. Glen Ayers, a former federal bankruptcy judge in Texas, will be the basis of a discussion at the meeting.

Mr. Ayers, who is a lawyer at Langley & Banack in San Antonio, said he expects that these documentation problems will halt a lot of foreclosures. That will mean pain for investors who hold the securities. The problem for those who expect to receive the benefit of the note, Mr. Ayers said, is that they “may not be able to show to the judge they have a right to foreclose.”

“It’s a huge problem,” he added. “It’s going to be expensive, I don’t know how expensive, ultimately to the bondholders.”

More Articles in Business »A version of this article appeared in print on March 1, 2009


Esteemed Neil & Brad,

May I respectfully RECOMMEND that New York Times’ Gretchen Morgenson be INVITED to cover your upcoming May 18 Lawyers’ Workshop? I’m sure her editor would give her carte blanche to spend a weekend in sunny Florida and interview my Mortgage Meltdown Heroes.

Few financial journalists seem to “get it” as Morgenson so aptly demonstrates she does. She could give our cause the national platform it rightly cries out for.

Allan (house-sitting a waterfront property on Pine Island, FL)

5 Responses

  1. Neil:
    How can you locate your specific mortgage sold to investors? Where can you locate the mortgage pools? They are not part of Prospectuses filed with SEC, normally.

  2. American Bankruptcy Institute’s annual spring meeting on April 3. Does anyone know what happened at that meeting. Please share any information that you may have. Thank you.

  3. We need to get Mr. Garfield on a major newspaper or TV station. We need to share more of the good stories and victories.


    I wrote Gretchen many months ago @ NYTIMES. She wrote me heartfelt email to fight on and stay in touch if anything happens with my home.
    She truly is one of the few financial journalists that do get it and care about the little guy !

    I hope someday to give her a great ending to my story !

  5. MBIA Sues Merrill Lynch Over Subprime-Debt Protection (Update2)
    Share | Email | Print | A A A

    By Jody Shenn

    April 30 (Bloomberg) — MBIA Inc., the largest bond insurer, said two of its units sued two Merrill Lynch & Co. businesses now owned by Bank of America Corp. over protection sold against mortgage-debt defaults.

    The suit, filed in New York State Supreme Court, seeks to unwind or recover payouts for $5.7 billion of credit-default swaps and related insurance sold against collateralized debt obligations, Armonk, New York-based MBIA said today in a statement.

    Merrill Lynch misrepresented the nature of the debt being protected as part of a “deliberate strategy to offload” billions of dollars of “deteriorating” subprime mortgages between July 2006 and March 2007, as homeowner defaults began to soar, the insurer said in the statement.

    “Today’s action is consistent with our intention to pursue all available remedies against those parties whose improper actions have directly resulted in substantial losses for MBIA and its shareholders,” MBIA Chief Executive Officer Jay Brown said in the statement.

    William Halldin, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment.

    Bond insurers including MBIA and Ambac Financial Group Inc. have sued banks including JPMorgan Chase & Co. and GMAC LLC over the quality of the home-loan securities they agreed to back. Those suits have generally involved mortgage-backed bonds, not the CDOs created from those mortgage-backed securities or other CDOs tied to them.

    Canceling Contracts

    The CDOs’ values have fallen even more sharply, with some AAA classes returning nothing to investors in liquidations, according to Standard & Poor’s.

    The guarantors have also reached agreements to cancel some contracts on mortgage-tied CDOs at discounts to projected losses, with banks including Merrill Lynch and Credit Agricole SA. Merrill Lynch last March sued a bond insurer now known as Syncora Holdings Ltd. as the guarantor threatened to void $3.1 billion of CDO contracts. They later settled the contracts.

    Soaring mortgage losses amid the worst U.S. housing slump since the Great Depression last year cost MBIA its top insurance ratings, leading the company this year to split its guarantee business in two in a bid to return to the municipal-bond market. Moody’s Investors Service downgraded the unit that retained structured-finance guarantees to a non-investment grade.

    MBIA, whose insurance split sparked at least two lawsuits by bond buyers invested in debt that unit guarantees or its notes, has dropped 55 percent in New York Stock Exchange composite trading in the past 12 months.

    Inside CDOs

    Merrill, the largest CDO underwriter before the market collapsed, agreed to sell itself to Bank of America in September as competitor Lehman Brothers Holdings Inc. neared bankruptcy.

    CDOs repackage debt such as mortgage bonds and leveraged loans into new securities with varying risks. Credit-default swaps on them offer payments if the securities aren’t paid down as expected, in return for regular insurance-like premiums.

    The case is MBIA Insurance Corp and LaCrosse Financial Products LLC v. Merrill Lynch, Pierce, Fenner and Smith Inc. and Merrill Lynch International, 09601324, Supreme Court of New York (Manhattan).

    To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net
    Last Updated: April 30, 2009 18:28 EDT

    Jose Semidey
    Mortgage Analysis and Consulting
    Rescuing the truth in lending

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