Clouded Title Means No Foreclosure

Bank of America may discover that it has millions of loans on its books that it thought it had transferred to trusts that issued mortgage backed securities, because 96% of Countrywide loans were ostensibly securitized. As the Congressional Oversight Panel explained, that outcome alone could cause massive damage to a bank’s balance sheet. And as bad as that would be, it isn’t the only problem that could result from Countrywide hanging on to the notes.

Countrywide’s Mortgage Document Errors May Doom Bank of America

By ABIGAIL FIELD Posted 1:30 PM 11/22/10 , , , , , ,

Countrywide's Mortgage Document Errors May Doom Bank of America

Testimony in a New Jersey foreclosure case decided last week may spell big trouble for Bank of America (BAC). If what one bank employee said on the stand proves to be accurate, paperwork problems it acquired when it purchased the failing mortgage provider Countrywide in 2008 could leave BofA on the hook for billions of dollars.

Linda DiMartini, a supervisor and operational team leader for the Litigation Management Department of BAC Home Loans Servicing, testified in the foreclosure case of John T. Kemp that it was “customary for Countrywide to maintain possession of the original note and related documents.”

If that’s true, then Bank of America may discover that it has millions of loans on its books that it thought it had transferred to trusts that issued mortgage backed securities, because 96% of Countrywide loans were ostensibly securitized. As the Congressional Oversight Panel explained, that outcome alone could cause massive damage to a bank’s balance sheet. And as bad as that would be, it isn’t the only problem that could result from Countrywide hanging on to the notes.

If the mortgage-backed securities aren’t in fact “mortgage-backed,” investors who bought them could be able to force BofA to buy the securities back. A significant number of buybacks could on its own destroy BofA’s balance sheet. Nor could BofA stave off either outcome retroactively by delivering those notes today. First, the contracts that created the trusts would typically forbid transferring the loans into the trusts now. Second, even if somehow that could happen, such a transfer would destroy the special tax status the mortgage backed securities enjoy and give the investors a different reason to put back the securities or sue over them.

Retaining Documents While Servicing the Loans

At oral argument, BofA’s attorney conceded that DiMartini’s testimony was accurate and that as a result, BofA had failed to deliver the note at issue in that case to the trust under the contract or otherwise applicable law:

“[A]lthough Your Honor is right and the UCC and the Master Servicing Agreement apparently requires [physical delivery of the note to the trustee], procedure seems to indicate that they don’t physically move documents from place to place because of the fear of loss and the trouble involved and the people handling them. They basically execute the necessary documents and retain them as long as servicing’s retained. The documents only leave when servicing is released.”

The judge ominously replied: “They take their chances.”

Bank of America, via its spokesman Larry Platt, who is a partner at K&L Gates in Washington, told DailyFinance:

“Countrywide’s policy and practice has been and remains to fully comply with the pooling and servicing agreements, including forwarding any necessary documents to the trustee. The associate whose testimony was cited in the ruling was asked about a process outside her normal scope of responsibilities and in an entirely different department from where she worked. A review of her testimony shows she later clarified that she was not comfortable testifying about the circumstances under which original loan documents would move, or whether and to what extent they ever are moved. This would include the initial delivery of original loan documents to the trustee.”

Bruce Levitt, the attorney representing Kemp commented:

“DeMartini was flown to New Jersey from California to testify as the document custodian, the person BofA chose to get the note and other documents admitted as evidence. She was refreshingly unrehearsed; she testified with confidence and candor. She wanted the judge to understand that BofA was very careful with the notes.”

Moreover, if Platt is right and Countrywide always delivered the notes, why did BofA’s attorney in the Kemp case make the admission to the contrary quoted above?

If Countrywide didn’t deliver the notes, how many loans are at issue? Well the loan in question in the specific court case — Kemp v. Countrywide Home Loans — was supposedly securitized in June 2006. So securitizations involving Countrywide loans for at least some time before that date and certainly thereafter are affected. And this case begs the wider question: Is it really possible that it was only Countrywide that followed the practice of not physically delivering the documents of securitized mortgages?

“There’s been talk on the street for years that banks didn’t send the notes up the line when they did securitizations,” explained Max Gardner, a consumer bankruptcy attorney not affiliated with this case but who has litigated foreclosures based on bad bank documents for years. “But this is the first time I’ve seen someone under oath admit there was a policy not to deliver the notes. I had to read it twice to make sure that’s really what she said, but she did: It was customary.”

The Kemp Case

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Bank of America made at least three attempts to fix its note problem in the context of the Kemp bankruptcy case. To prove it had the right to foreclose on Kemp’s house, BofA needed to show that Bank of New York, the trustee for the 2006 securitization, had the right to foreclose. If BoNY had the right to foreclose, BofA could foreclose on its behalf. But for BoNY to have that right, the trust had to have the note and mortgage, which is why Countrywide’s hanging on to the notes was a problem.

One effort BofA made was to file an assignment of mortgage and note to BoNY from March 2007. But under the contracts for securitizations in general — those under New York law, which is most of them — that assignment would have been too late, and thus void. The judge didn’t address that issue, simply noting that the note wasn’t delivered, so the assignment didn’t cure BofA’s problem.

DiMartini also admitted that another document — an “allonge” — that BofA submitted to try to solve its note problem hadn’t been created in 2006, as BofA was implicitly suggesting by giving it to the court, but had been created only a few weeks before, specifically for the Kemp trial. And created sloppily at that: It referred to the trust as “6006-8” instead of “2006-8.” Again, the judge didn’t address all the problems that flowed from the timing of the document’s creation because the note was not delivered, which meant that BofA’s problem remained.

BofA made at least one additional attempt to solve its note problem: At one point, it filed a “lost note affidavit” claiming the original note had been lost. Given DiMartini’s testimony and the bank’s later “discovery” of the note, BofA’s attorney asked the judge to disregard that filing.

Clouded Title Means No Foreclosure

For Kemp, the upshot of all these document problems is that the claim of Bank of New York via BofA to get paid under Kemp’s mortgage was disallowed by the bankruptcy judge.

Assuming the case follows the normal course going forward, that will mean that neither bank will be able to foreclose on Kemp’s house, and his mortgage debt will become unsecured debt — the banks will have to stand in line with the credit card issuers and get paid only a portion of the principal.

If it’s true the securitization trusts routinely didn’t get notes delivered from Countrywide, then all those properties — millions of properties — could have clouded titles. That hurts many people outside of the bank, because clouded title makes selling those properties much harder, and leaves the current owners in a kind of legal limbo. As the Congressional Oversight Panel warned:

Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse. … If such problems were to arise on a large scale, the housing market could experience even greater disruptions than have already occurred, resulting in significant harm to major financial institutions.

So much for the banks’ claims that these paperwork problems are technicalities that will be quickly resolved.

See full article from DailyFinance:

27 Responses

  1. looking for a lawyer to do quiet title for me I live in Illinois anx cant find anyone to do it. please email me

  2. What does FASB 166 and 167 stand for? If countrywide must now stand in line with the credit card creditiors, why can the judge in Kemp merely discharge the unsecured debt?

  3. The new marching fight mantra should be, “The Lawyers don’t get it, but the Banks can’t have it.”

    Its really that simple, there are probably less than 10% of the mortgages written since 2003 that are secured by anything more than the banks imagination and the Courts indifference.

    51 Months and Holding…………


    Solomon v Eloan, Wells Fargo, Mers

  5. Tomorrow find something to be THANKFUL for…banks can not take away gratitude!
    Hoping for THANKSGIVING for everyone!

  6. Concerned

    Came across it – but it is not unusual – most trustees to stated trusts were also the swap administrator.

    Thus, trustees KNOW when collection rights are “swapped out” of the trust. No foreclosure attorney wants to allow a deposition of a trustee. Just do not see this happening.

    Foreclosure attorneys like to attach themselves to trusts – but the attachment is a shoestring – that has been broken.

    Security Underwriter is usually stated in bold letters on the prospectus 424B5 – many miss this. Then you have to go to “Conveyance of Mortgage Loans” in the PSA. This tells you that certificates to the trust are sold to the security underwriters.

    However, Countrywide securitizations – and I am really stretching to call them securitizations – because Countrywide was NOT an investment bank – do not report a “Conveyance of Mortgage Loans” in the PSA – at least not that I can find.

    Countrywide was a jack of all trades – they appeared to EVERYTHING. But, someone was funding Countrywide. And, – usually a party that funds – will do the buyout/bailout when the other party is in trouble.

    My suspicion is that the Countrywide MBS was never really MBS – but, rather, securitization of debt – debt deemed non-compliant for MBS. Think investors are onto this.

  7. Alina

    Do not believe the originator was a Credit Suisse subsidiary. In Countrywide loans – the originator was likely also Countrywide (prospectus does not state who originated – but Countrywide originated loans). This means the notes/loans never left Countrywide. However, most securitizations just ignore the sale of the loan to security underwriter parent from the originator. Credit Suisse securitizations do not skip this sale of the loan in PSA./Prospectus. Credit Suisse securitizations usually state that the loan originations (originator not a subsidiary of Credit Suisse) were sold to DLJ – a Credit Suisse subsidiary. This means that the receivables were on Credit Suisse’s balance sheet – and moved to an off-balance sheet conduit – which must now be brought back onto Credit Suisse’s balance sheet by FASB 166 and 167. Credit Suisse annual reports state that they have complied with FASB 166 and 167.

    Whether a true sale occurred depends upon Credit Suisse’s involvement in the trust – repurchase agreement may negate a true sale – also, continued control in the trust may negate true sale. Will assume that this is why FASB 166 and 167 were created. There is little precedent law that addresses a true sale. Frankly, cannot believe foreclosures even proceed without a court addressing this issue. It is likely an issue that could go as high as the Supreme Court of the United States – but no one will ever get that far – because judges are just content with — “you owe the money” – and many do not care about legalities.

    Nevertheless, GAAP addressed this – and that is why we now have FASB 166 and 167.

  8. Above deals with note that apparently still exists. Can a “lost note” be negotiated and transferred multiple times? UCC would seem to say no, but I’ve not seen a case where this has come up.

  9. @ Tim,

    Exactly! My attorney kept trying to convince me that walking away makes good business sense. These BK attorneys here are nothing more than bankruptcy mills.

    We’re being slaughter here in Cali like sacrificial lambs being offered up to the god of greed.


    How did you find that Swap Contract with the CWABS pool? Where is the underwriter identified?

    I’m dealing with CWABS 2005-10. The PSA has much the same list of the issuer, depositor, and servicer.

    Will anyone be dragging the officer who signed the Sarbanes-Oxley Act statement into the legal frey?

  11. Hey Kickboxer, I know what your saying, they only what to do the straight file. Contra Costa County is tuff for homeowners. Is there any success lately?

  12. Yes, I’m in the California Central Valley. I could not find even one BK attorney that gets it. This one at least is going to file it “contested” and “unsecured” but convincing him to do it was like pulling teeth.

  13. Just one point about BK attorneys…..I’ve been told to stick to your locals because the judge’s like it. They don’t like out of town attorney’s

  14. Stan,

    Don’t presume too fast the the ‘left coast” has gotten on board. In CA it is STILL highly dependent on the judge or the particular county/district.

    Even with what is coming out about the CountryWide loans likely to be unsecured, some of the attorneys are advising clients to plan on accepting a modification via the courts.

    Given how the fraudsters want the borrowers to give up all rights and then the PERMANENT mods STILL have been breached (especially by BofA), I question the ‘deals’ the attorneys want to push. But they are wanting to push them with the thought that they do not have confidence in the judicial system!

    Some of the attorneys here pick and choose the cases they take, even if you can afford them.

  15. FNMA Does anyone have the level 2 agent number?
    GREAT everyone on the east and west coasts get it but here I am in Wis with PROOF and the Lawyers don’t want to take the case and The Attorney General doesn’t want to because of Political reasons

  16. Anonymous,

    Wouldn’t the same thing then apply to all Credit Suisse trusts? The Seller is DLJ Capital which is a Credit Suisse subsidiary and the servicer is Select Portfolio, another Credit Suisse subsidiary.


    11/12/2010 54 Document: Subpoena In A Case Under The Bankruptcy Code [Deutsche Bank National Trust company As Trustee Jennifer Van Dyne Trust Administrator] Filed by Debtor Brian William Davies (Avalos, Marie) (Entered: 11/15/2010)

    11/12/2010 55 Document: Subpoena In A Case Under The Bankruptcy Code [Bimini Capital Management Inc] Filed by Debtor Brian William Davies (Avalos, Marie) (Entered: 11/15/2010)

    11/12/2010 56 Document: Subpoena In A Case Under The Bankruptcy Code [Mortgage Electronic Registration Systems Inc] Filed by Debtor Brian William Davies (Avalos, Marie) (Entered: 11/15/2010)





  19. BK Attorneys are waiting for a victory in California. Look at what Brian Davies is going through.


  20. The big question is: how many other pretender/lenders did not move the mortgage and the notes to the securitized trust? I have a feeling that this is actually the tip of the iceberg. There are going to be many more Notes and Mortgages that did not make it into the securitized trust. Of course, there may be banks scrambling to “move” then now, but that is not the rule of law regarding securitized trusts. I hope BofA goes into receivership. They deserve it, and the homeowners deserve a break today.

  21. opps- I forgot some Fannie Mae guy emailed me this to go along with FNMA SS IO 3027; SMBS 302-7 (CUSIP # 31364JC84)

  22. does anyone know how to look up Fannie Mae Trust numbers? BofA claims my loan was sold to Fannie Mae and placed in FNMA SS IO 3027?

  23. CIG HFI ist Lien Mortgage is the claimed Creditor?

    what is the foreclosure defense agaisnt the defeinition of Creditor? if the claimed creditor is not the correct party.

  24. Looking at the prospectus for the named trust in this case – it is clear that a “true sale” did not occur. All entities involved in the securities process are Countrywide subsidiaries. In order to be a “true sale” – the seller of the receivables must isolate itself from control, cannot sell to “itself” (which Countrywide did here), and there can be no repurchases, etc, etc.

    In this CWABS 2006-8 – the seller is Countrywide Home Loans
    The issuing entity is CWABS (Countrywide Asset Backed Securities) Trust
    The depositor is CWABS, Inc.
    Servicer is Countrywide Home Loan Servicing

    And the security UNDERWRITER is –


    Clearly Countrywide maintained considerable control over the Trust – which would negate a true sale – perhaps why the note was never transferred to the trust in the first place – the trust was never structured as “bankruptcy remote.”.

    Further, Countrywide Securities Corporation’s position as an investment bank capable of distributing MBS is questionable at the least.

    And, in this particular series, there is a SWAP CONTRACT ADMINISTRATION AGREEMENT, dated as of June 28th,2006 (this “Agreement”), with THE BANK OF NEW YORK (“BNY”), as Swap Contrac Administrator. That was BNY’s role.

    Conclusion – The trust was not a “true sale” and notes and loans were not transferred to the stated trust – and remained on Countrywide Financial Corp.’s balance sheet – now Bank of America balance sheet. And, “the banks will have to stand in line with the credit card issuers and get paid only a portion of the principal.”

  25. kickboxer

    I am not in bankruptcy – but – over the years have informed many bankruptcy attorneys as to what is going on. They all ignored everything. Yesterday got an email from a BK attorney – who know says he is finally “getting it.” !!!! Hopefully, many BK attorneys are waking up!! And, this could lead to reopening many closed BK filings.

  26. Kickboxer,

    I presume you can’t find a BK attorney who DOES get it?

    Where are you located? Is it CA?

  27. I printed this yesterday so I could give it to my BK attorney who still doesn’t “get it.”

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