Bloomberg: BofA Mortgage Morass Deepens on Promissory Notes Issues

“If the notes weren’t properly transferred to the trusts, then investors have the mother of all put-back claims,” Adam J. Levitin, an associate professor at Georgetown University Law Center in Washington, wrote on a blog four days after citing the Wizmur ruling during a hearing by a House Financial Services subcommittee.

Editor’s Note: As Max Gardener is quoted in the article below, the attempt to “fix” their problem by creating transfer documents now is simply not a valid way of doing it. That’s why I refer to these mortgages and the documents being used in foreclosures as fatally defective. There is no legal or valid way to fix this. And the investors and borrowers are coming to see that they both have similar interests on the facts in proving that the mess created by these intermediaries in the securitization chain should NOT be laid on the door step of either investors or homeowners.

Investors, who are the real and sole source of funding for the pools from which the investment bankers took their money and then funded loans with what was left, have no interest in litigating with homeowners directly or indirectly, to enforce notes or mortgages that were non-conforming to the promises made to them when they bought the bogus mortgage bonds. So the situation is that the real creditor doesn’t want to enforce the obligation because they don’t want to take any action that would be interpreted as accepting the validity of the mortgages, notes or obligations.

But it is still investor money that was and is in the deal with the homeowner. The Wall Street intermediaries are trying to fill the gap with a technical procedural two-step which now is falling apart and for good reason — if the gambit adopted by Wall Street were accepted, wild deeds would be presumptively valid which would de-legitimize all real estate transactions and make it impossible to transfer or finance them.

By Prashant Gopal and Jody Shenn – Nov 29, 2010 11:00 PM CT
BofA Mortgage Morass Deepens, Employee Says Notes Not Sent

The headquarters of Bank of America Corp. in Charlotte, North Carolina. Photographer: Davis Turner/Bloomberg

Testimony by a Bank of America Corp. employee in a New Jersey personal bankruptcy case may give more ammunition to homeowners and investors in their legal battles over defaulted mortgages.

Linda DeMartini, a team leader in the company’s mortgage- litigation management division, said during a U.S. Bankruptcy Court hearing in Camden last year that it was routine for the lender to keep mortgage promissory notes even after loans were bundled by the thousands into bonds and sold to investors, according to a transcript. Contracts for such securitizations usually require the documents to be transferred to the trustee for mortgage bondholders.

In the case, U.S. Bankruptcy Judge Judith H. Wizmur on Nov. 16 rejected a claim on the home of John T. Kemp, ruling his mortgage company, now owned by Bank of America, had failed to deliver the note to the trustee. That could leave the trustee with no standing to take the property, and raises the question of whether other foreclosures could similarly be blocked.

Following the decision, the bank disavowed the statements by DeMartini, whom it had flown in from California to testify. It was the policy of Countrywide Financial Corp., acquired by Bank of America in July 2008, to deliver notes as called for in its securitization contracts, according to Larry Platt, an attorney at K&L Gates LLP in Washington designated by the bank to answer questions about the case.

“This particular employee was mistaken in what she said,” Platt said in a telephone interview.

Attorney Analysis

Wizmur’s ruling is being scrutinized by lawyers for borrowers seeking to stall repossessions as a way to press lenders to modify their debt. Attorneys for homeowners have already won cases by calling into doubt the legitimacy of affidavits used to take back properties.

“If this is correct, many, many, many foreclosures already occurred in which this plaintiff didn’t have the note,” said Bruce Levitt, the South Orange, New Jersey, attorney representing Kemp. “This could affect thousands or hundreds of thousands of loans.”

Companies that service loans, including Bank of America, temporarily halted home seizures in the wake of disclosures that they relied on employees to sign thousands of affidavits without reading them, a practice that has become known as robo-signing. The attorneys general of all 50 states are jointly investigating foreclosure practices of servicers.

Bank of America, based in Charlotte, North Carolina, is the largest U.S. mortgage servicer, overseeing $2.09 trillion of loans as of Sept. 30, according to industry newsletter Inside Mortgage Finance.

Investor Impact

The Kemp case is also being examined by lawyers for investors in mortgage-backed securities. Owners of the bonds have been cooperating in an effort to force sellers to take back loans, saying they were misled about their quality. The Wizmur ruling may give investors an additional opportunity to push for mortgage buybacks on grounds that the bonds weren’t created in keeping with securitization contracts.

“It may mean investors who think they bought mortgage- backed securities bought securities that aren’t backed by anything,” said Kurt Eggert, a professor at Chapman University School of Law in Orange, California.

The potential impact of DeMartini’s testimony may depend on the outcome of a broader dispute between homeowner and industry lawyers about whether missing or incomplete paperwork subsequently can be fixed, Eggert said.

‘Not Customary’

Wizmur, chief judge of the U.S. Bankruptcy Court for the District of New Jersey, said during hearings that the Countrywide securitization contract covering Kemp’s loan called for a trustee to take possession of the promissory notes, which represent the borrowers’ obligation to repay their loans.

The judge asked DeMartini whether the notes ever move to follow the transfer of ownership, according to the transcript of the August 2009 hearing.

“I can’t say that they’re never moved because, I mean, with this many millions of loans as we have I wouldn’t presume to say that, but it is not customary for them to move,” DeMartini said.

“This is something that would concern investors,” said Talcott Franklin, a Dallas-based lawyer whose firm is helping owners of more than $600 billion of mortgage bonds as they consider ways to limit their losses.

DeMartini held management and training positions since joining Countrywide Home Loans about a decade ago, according to her testimony. She said she has been involved in every aspect of servicing and “had to know about everything in order to do that.”

Beyond DeMartini’s Knowledge

Platt, the lawyer for Bank of America, said DeMartini was wrong, as was the bank’s local attorney in the case, who argued in court that notes weren’t moved in part because of the risk of losing them. The transfer of mortgage notes was outside the scope of DeMartini’s knowledge because she doesn’t deal with the sale of loans, Platt said.

DeMartini, who at one point said she wasn’t “comfortable” testifying about the extent to which notes were transferred before continuing to do so, couldn’t be reached for comment. Jerry Dubrowski, a spokesman for the bank, said that she remains an employee.

Banks including JPMorgan Chase & Co. and Washington Mutual Inc. said in prospectuses for some mortgage-bond deals that they would hold onto notes for the trusts. They were empowered to act in custodial roles on behalf of trustees, according to the pooling and servicing agreements that govern the transactions.

Countrywide Deals

The securitization contracts related to the Kemp loan, and at least two other Countrywide mortgage-bond transactions, didn’t assign the company the additional role of document custodian for the trust. Countrywide, as the servicer, can take back the notes from the trustee when needed to manage foreclosure actions and mortgage payoffs, according to the contracts.

One risk to investors when notes remain with sellers acting as custodian is that an acquirer or creditor of those companies could walk in and take the notes, the banks that disclosed the practice in mortgage-bond prospectuses warned. Typically, trustees or custodians also are charged with checking that either all the necessary documents get delivered or letting sellers know about missing paperwork.

“If Countrywide had a special agreement to act as a stand- in for the trustee, given the inherent conflicts involved, one would have thought that would have been material and disclosed to investors,” said Joshua Rosner, an analyst at New York-based Graham Fisher & Co.

He said that the possibility that Countrywide retained documents raises questions about whether Bank of New York Mellon Corp., which serves as the trustee for the securitization of the Kemp loan, fulfilled its obligation to review loan files.

Stress-Tested System

“We have an established, clearly defined document review process,” said Kevin Heine, a spokesman for New York-based BNY Mellon. “It is a controlled and well-documented system that has been stress-tested and audited. We are comfortable that it works well.”

Heine declined to comment on the Kemp case or Countrywide’s policies.

Mortgage-bond contracts require that loan sellers deliver certain files to trustees, or other companies acting on their behalf, typically within a few months. “Material” missing paperwork can require sellers to take back loans for their full face value, according to the agreements.

“If the notes weren’t properly transferred to the trusts, then investors have the mother of all put-back claims,” Adam J. Levitin, an associate professor at Georgetown University Law Center in Washington, wrote on a blog four days after citing the Wizmur ruling during a hearing by a House Financial Services subcommittee.

Trust Law

Giving notes to the trustees after the fact isn’t a solution because the rules governing trusts, enforced by New York trust law, require that assets are in place by a specified closing date, said O. Max Gardner III, a Shelby, North Carolina, bankruptcy litigator. The notes also can’t be transferred to the trust without first being conveyed through a chain of interim entities, he said.

“If they do an end run and directly deliver it to the trust, that would violate all the documents they filed with the SEC under oath as to what they did,” Gardner said.

Industry lawyers said trust law isn’t relevant in this instance. Based on other legal codes, loans have already been transferred into the mortgage-bond trusts, making a clean-up of paperwork permissible, they said.

Refuted Attack Strategies

“Those who seek to attack the integrity of securitizations have taken a number of approaches that have been refuted, so now they’re focusing on New York trust law,” said Karen B. Gelernt, a lawyer in New York at Cadwalader, Wickersham & Taft LLP who works for banks.

The part of the law they cite relates to “actions taken by the trustee after the trust is formed; it’s nonsensical to apply this provision to the creation of the trust,” she said. “There doesn’t appear to be any case law that supports their interpretation.”

Platt, the Bank of America lawyer, said that any bank that failed to initially deliver all the documents required in contracts may be required to refund investors only in cases in which foreclosures actually get blocked.

“The judges may decide it’s better for the system to allow everyone to” send missing paperwork to trustees, said Rosner, the Graham Fisher analyst. “It’s too early to really answer question about the implications” if the Bank of America testimony is true.

The case is In the Matter of John T. Kemp, Kemp v. Countrywide Home Loans Inc., 08-02448, U.S. bankruptcy Court for the District of New Jersey (Camden).

To contact the reporters on this story: Prashant Gopal in New York at; Jody Shenn in New York at

To contact the editors responsible for this story: Kara Wetzel at; Alan Goldstein at

12 Responses

  1. […] This post was mentioned on Twitter by Conspiratorium 101 and Ambrosius Macrobius, Deb. Deb said: Bloomberg: BofA Mortgage Morass Deepens on Promissory Notes Issues: “If the notes weren’t properly transferred t… […]

  2. John: if a servicer, or supposed servicer for trust, modifies orignal loan being advised it was fraudulently induced and/or fraud in factum, but does so anyway, (to keep me quiet and paying) and continues to collect, Is that fraud as well, since they were advised of my complaints, in writting and in loan modification paperwork?

  3. Too bad that some how,

    The headquarters of Bank of America Corp. in Charlotte, North Carolina.

    couldn’t be foreclosed on like they did to so many of us!

  4. Neil – Agree – but – WHO ARE THE INVESTORS??

    Which investors are you referring to??
    Cannot be pass-through Mortgage-Backed Security Investors – they have already been paid by return of principal by the swaps. So who are the remaining investors???

  5. Fidelity National Title has to be fighting hard behind the scenes in Courts and with the Banks to make MERS related foreclosures good since Fidelity National Title has insured the titles of people in the past who bought bad foreclosures. Fidelity is NOT a
    company that likes to indemnify – it is bad for their bottom line and they rather hide from their investors that they insured bad titles and forged deeds.

  6. Judge Schack continues to hold banks to their burden of proof: Wash. Mut. Bank v. Phillip, 2010 NY Slip Op 52034

  7. @John,

    We seem to be having two different discussions. I’m saying that you can’t modify a fraudulent mortgage, PERIOD. To do so permits the crime.

  8. E. Tolle….. papers over WHAT fraud? Federal banks can loan money on a whim. They only answer to the federal reserve, period. You signed the credit statement and the investor should have read what he was buying. The courts have ruled about this already. You should have read your docs before signing. HOWEVER now for the banks to foreclose they must abide by the law, period.

  9. You can be sure that the fraud goes from just before the loan was closed all the way to the Trusts and beyond. Remember, this is the biggest Ponzi scheme ever created. I would not be surprised to see even more fraud than we have already coming out over the next few weeks. I, too, am hoping that Wikileaks gets those BofA documents out there. I hope he got the hidden accounting system as well. Literally, millions of people have been defraud and lost or are losing their homes. The final final is that who the Hell is going to do business with banks that defraud customers? Who in the world will want to do business with the USA if we are just one big fraud waiting to happen?

  10. @John,

    Modifying fraudulent mortgages just papers over the fraud. Every effort must be made to not accept modifications in return for whitewashing established law. Screw housing prices. They can’t be propped up to save a system that is broken and criminal from top to bottom.

    The quote from above….

    “The judges may decide it’s better for the system to allow everyone to” send missing paperwork to trustees, said Rosner, the Graham Fisher analyst.

    …..sounds like yet another attempt at bypassing established law. Knowing how captured our system is, I have no doubt that multiple attempts at allowing past transgressions will be the rule, until one sticks and the banks can get back to work hiking fees and creating more toxic derivatives. Ripping us off is what they do best, next to bribing our elected officials into aiding them.

  11. Outstanding, Like I said BK court is the best place to litigate. They must prove the debt, how it was transfered to them and in California prove that foreclosure will net the owner the best result. Robo signing a foreclosure so it cost less to foreclose is fraud on the court when robo docs are filed. If the banks are required to foreclose by law it will cost them more then to offer a loan mod to help the homeowner stay in the home thus helping stabilze prices.

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