Foreclosure Ethics

"Foreclosure Fraud: It's Worse Than You Think

...There has been precious little talk of what the real legal issues are behind the robosigning scandal.

...The real issue is ownership of these loans and who has the right to foreclose.

...foreclosures are governed by state law. There is no real federal jurisdiction.

...Adam Levitin, a Georgetown University Law professor who specializes in, among many other financial regulatory issues, mortgage finance...says the documentation problems involved in the mortgage mess have the potential "to cloud title on not just foreclosed mortgages but on performing mortgages."

The issues are securitization, modernization and a whole lot of cut corners.

Real estate law requires real paper transfer of documents and titles, and a lot of the system went electronic without much regard to that persnickety rule.

Mortgages and property titles are transferred several times in the process of a home purchase from originators to securitization sponsors to depositors to trusts. Trustees hold the note (which is the IOU on the mortgage), the mortgage (the security that says the house is collateral) and the assignment of the note and security instrument.

The issue is in that final stage getting to the trust.

The law demands that when the papers get moved around they are "wet ink," that is, real signatures on real paper.

But Prof. Levin tells me that's not the worst of it. Affidavits assigned to the notes and security instruments are supposed to be endorsed over to the trust at the time of sale, but in many foreclosure scenarios the affidavits have been backdated illegally.

So with the chain of documentation now in question, and trustee ownership in question, here is one legal scenario, according to Prof. Levitin:

The mortgage is still owed,
but there's going to be a problem figuring out who actually holds the mortgage,
and they would be the ones bringing the foreclosure.

You have a trust that has been getting payments from borrowers for years
that it has no right to receive.

So you might see borrowers suing the trusts saying give me my money back,
you're stealing my money.

You're going to then have trusts that don't have any assets that have been issuing securities
that say they're backed by a whole bunch of assets,
and you're going to have investors suing the trustees for failing to inspect the collateral files,
which the trustees say they're going to do,
and you're going to have trustees suing the securitization sponsors
for violating their representations and warrantees about what they were transferring.

Adam Levitin
Georgetown University

Josh Rosner, of Graham-Fisher, put the following out in a note today,
claiming violations of pooling and servicing agreements on mortgages
could dwarf the Lehman weekend:

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 the Trustee shall succeed to such right, title and interest...

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.

That is to say the actual loans were apparently
not, as of either the cut-off or closing dates,
assigned to the Trust as required by the PSA.

Rather than continue to fight for the “put-back” of individual loans
the investors may be able to sue for and argue that the “true sale” was never achieved.

Josh Rosner
Graham-Fisher

Diana Olick
CNBC Real Estate Reporter