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Why "produce the note" works -- the chain of securitization

Pam Martens has an excellent article in Counterpunch that explains the whole process:

Three plain talking judges, in state courts in Massachusetts and Kansas, and a Federal Court in Ohio, have drilled down to the “straw man” aspect of securitization. The judges’ decisions have raised serious questions as to the legality of hundreds of thousands of foreclosures that have transpired as well as the legal standing of the subsequent purchasers of those homes, who are more and more frequently the Wall Street banks themselves. ....

The problems grew out of the steps required to structure a mortgage securitization. In order to meet the test of an arm’s length transaction, pass muster with regulators, conform to accounting rules and to qualify as an actual sale of the securities in order to be removed from the bank’s balance sheet, the mortgages get transferred a number of times before being sold to investors. Typically, the original lender (or a sponsor who has purchased the mortgages in the secondary market) will transfer the mortgages to a limited purpose entity called a depositor. The depositor will then transfer the mortgages to a trust which sells certificates to investors based on the various risk-rated tranches of the mortgage pool. (Theoretically, the lower rated tranches were to absorb the losses of defaults first with the top triple-A tiers being safe. In reality, many of the triple-A tiers have received ratings downgrades along with all the other tranches.)

Because of the expense, time and paperwork it would take to record each of the assignments of the thousands of mortgages in each securitization, Wall Street firms decided to just issue blank mortgage assignments all along the channel of transfers, skipping the actual physical recording of the mortgage at the county registry of deeds.

Astonishingly, representatives for the trusts have been foreclosing on homes across the country, evicting the families, then auctioning the homes, without a proper paper trail on the mortgage assignments or proof that they had legal standing. In some cases, the courts have allowed the representatives to foreclose and evict despite their admission that the original mortgage note is lost. (This raises the question as to whether these mortgage notes are really lost or might have been fraudulently used in multiple securitizations, a concern raised by some Wall Street veterans.)

(On the fraud, see William Black.)

Also, just supposing: Supposing that the trusts knew that the mortgages notes had, in fact, been used fraudulently. Isn't it likely that they'd back off, when challenged, if a demand to "produce the note" would expose the fraud?

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chicago dyke's picture
Submitted by chicago dyke on

"activism." my father was a judge, and one thing he learned is that the voters expect you to care about them, more than faceless corporations or outsiders trying to mess with your world. judges have to be very careful about rulings that have an impact on something like the health of communities and real estate in them.

here, there is a quiet neighborhood push to make sure all the homes for sale or unoccupied don't go feral, in order to keep up property values. because the HOA has realized there's no point in putting a lien on a house that isn't conforming to neighborhood upkeep guidelines, if you can't actually locate the mortgage holder. so we're just taking care of empty houses and the lots they are on, on our own.

anyway, i'm a little distracted just now, my point is simply that i believe as the economy continues to decline and more people can't pay their mortgages, judges will find more and new ways to tell the wall street folks to fuck off. a judge who doesn't would face political consequences.

Jeff W's picture
Submitted by Jeff W on

care about people and voters and stuff but I have a feeling that what's going on here is that judges are concerned about, well, evidence and proof and standing. If you're foreclosing on a mortgage note, it's probably a good idea (= required) to be able to produce the original note. Judges can, sua sponte ("on one's own motion"), issue orders to show cause, as mentioned here, regarding the notes:

At least two Florida judges shared Ms. Charney’s skepticism regarding the copious amounts of MERS lost note affidavits and they issued show cause orders, sua sponte, challenging MERS to show proof that it held and/or lost notes in numerous actions. After evidentiary hearings these two alert judges dismissed twenty nine (29) MERS actions to foreclose for lack of standing. One judge struck MERS pleadings as being sham. A South Carolina court dismissed a MERS action to foreclose for lack of standing even though MERS filed an affidavit wherein a person claiming to be an officer of MERS claimed that MERS was holding a promissory note. The South Carolina court vetted the MERS affidavit claim that it was the holder of the note after being apprised of the fact that MERS had previously told the Nebraska Court of Appeals that it never held promissory notes.

In late 2007 three Federal Court Judges in Ohio dismissed over fifty law suits brought by trustees of mortgage backed trusts where they could not produce the original promissory notes. Following these decisions the Bankruptcy Court in Los Angelas, California adopted a rule of practice which requires all foreclosing trustees or other plaintiffs to produce the original promissory note when bring an action to foreclose a debt or face sanctions for not doing so. Several court in New York have been routinely dismissing foreclosure actions brought by MERS or its members because they continually fail to produce promissory notes.

Courts have to have jurisdiction to hear a case and the judges in those courts are responsible for establishing that jurisdiction exists, even if the parties don't raise it. (The parties can't waive the jurisdictional requirements or, by not addressing them, sort of slide in.) If one of the parties. the one alleging that it holds the note, can't show that it holds the note by producing the original (courts are big on originals, which is why it's a good idea to sign legal documents in blue, rather than black, ink—it's easy to tell they're originals), it has no standing and the case must be dismissed. District Judge Christopher A. Royko (N.D. Ohio), in his In re Foreclosure Cases decision [PDF], made the whole thing crystal clear:

There is no doubt every decision made by a financial institution in the foreclosure process is driven by money. And the legal work which flows from winning the financial institution’s favor is highly lucrative. There is nothing improper or wrong with financial institutions or law firms making a profit — to the contrary , they should be rewarded for sound business and legal practices. However, unchallenged by underfinanced opponents, the institutions worry less about jurisdictional requirements and more about maximizing returns. Unlike the focus of financial institutions, the federal courts must act as gatekeepers, assuring that only those who meet diversity and standing requirements are allowed to pass through. Counsel for the institutions are not without legal argument to support their position, but their arguments fall woefully short of justifying their premature filings, and utterly fail to satisfy their standing.

The same is likely true of state court standing requirements. (Judges probably do also want to tell those finally institutions to fuck off—you can see it in Judge Royko's reference to the plaintiff's somewhat suicidal “Judge, you just don’t understand how things work” argument—but, aside from a roiling populism, basic standing requirements are at issue here.)

nihil obstet's picture
Submitted by nihil obstet on

Matt Taibbi's Rolling Stone article puts it stronger:

The same is true for mortgages. When lenders couldn't find enough dope addicts to lend mansions to, some simply went ahead and started selling the same mortgages over and over to different investors. There are now a growing number of cases of such double-selling of mortgages: "It makes Bernie Madoff seem like chump change," says April Charney, a legal-aid attorney based in Florida. Just like in the stock market, where short-sellers delivered IOUs instead of real shares, traders of mortgage-backed securities sometimes conclude deals by transferring "lost-note affidavits" — basically a "my dog ate the mortgage" note — instead of the actual mortgage. A paper presented at the American Bankruptcy Institute earlier this year reports that up to a third of all notes for mortgage-backed securities may have been "misplaced or lost" — meaning they're backed by IOUs instead of actual mortgages.

quixote's picture
Submitted by quixote on

Just wow. I hadn't heard of this fraud, even though I follow the financial news somewhat closely, and knew what tranches, CDOs, securitization, and the whole boiling was.

And with all those tranches, who knows how many times they sold parts of one mortgage? Who knows if they knew? A mere amateur conman might have sold it three or four times. These guys had high speed cables and high frequency trading. They probably sold them hundreds of times.

I'm to the point of collapsing into helpless laughter, cuz the only other thing to do is . . . is . . . . I have no idea what else to do.

coyotecreek's picture
Submitted by coyotecreek on

If a bankster can't produce paper for a foreclosure, what about being liable for your mortgage payments?

If the paper trail doesn't exist - it doesn't exist, for anything related to the why not do a title search, and if something is missing, stop paying your mortgage?

Submitted by lambert on

Not being a lawyer, I can't offer legal advice...

That said, if our betters want us all to adopt the ethic of "Take what you can," they couldn't really be doing a better job than they are now.

BDBlue's picture
Submitted by BDBlue on

to the person who holds your note. If the note wasn't assigned properly, then you don't owe any money to the person to whom it was assigned. So, you only owe the money to someone who can prove they hold the mortgage (that's the entire basis for the debt). If no one can prove they own the mortgage, then you don't owe anyone any money legally.

One of the interesting things is the suspicion that some of these notes are missing because the same mortgage was used multiple times in a securities package. That they disappeared to hide that fraud.

But if no one has the note (or is willing to produce it), then you don't owe anyone any money.