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« Financial Times: "The real danger here for banks is that 'Show me the note' becomes widespread" | Main | CHART: Foreclosures made up 25 percent of national home sales in third quarter »

Josh Rosner: "Foreclosure Fraud Nightmare Scenario Could Dwarf The Lehman Weekend"

Several questions are answered below.  Read this carefully.


There has been plenty of pontificating over the ramifications of foreclosure freezes on troubled borrowers, foreclosure buyers and the larger housing market, not to mention lawsuits, investor losses and bank write downs. There has been precious little talk of what the real legal issues are behind the robosigning scandal. Yes, you can't/shouldn't sign documents you never read, but that's just the tip of the iceberg. The real issue is ownership of these loans and who has the right to foreclose. By the way, despite various comments from the Obama administration, foreclosures are governed by state law. There is no real federal jurisdiction.

A source of mine pointed me to a recent conference call Citigroup had with investors/clients.  It featured Adam Levitin, a Georgetown University Law professor who specializes in, among many other financial regulatory issues, mortgage finance. Levitin 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.

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.

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 its rights under this Agreement (to the extent set forth in Section 15), and the Trustee shall succeed to such right, title and interest in and to the Mortgage Loans and the Purchaser's rights under this Agreement (to the extent set forth in Section 15)”.

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.

Quite the can of worms. Anyone who says that the banks will fix all this in a few months is seriously delusional.



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Reader Comments (10)

Sadly, you are really on the money about this being a one hugely sick can of worms that is in no way going away anytime soon. It's got me wondering what the courts will look like in regard to all those who have already been foreclosed on now realize how they were either snookered out of their homes or get into their heads that they want those houses back because the documents weren't legal.

We are in no way out of the woods and it could be a problem for years to come, in my mind.
Oct 12, 2010 at 9:36 PM | Unregistered CommenterHal (GT)
Hal...it could play out in a number of ways...we've been discussing it on other threads...but this genie won't go back into the bottle easily...
Oct 12, 2010 at 9:54 PM | Registered CommenterDailyBail
Ohio Attorney General Fights Against Wall Street


This guy seems pretty legit...read this one...
Oct 12, 2010 at 9:55 PM | Registered CommenterDailyBail
“There’s a belief here that Wall Street is a fixed casino and it’s back in business, and we’re left holding the bag,” said Mr. Cordray, whose office overlooks East Broad. “It’s important for us to show we’ll go after a company that does wrong.”

Mr. Cordray in two years in office has demonstrated a willingness to sue early and often, filing lawsuits against global financial houses, rating agencies, subprime lenders and foreclosure scammers. He has wrested about $2 billion so far, a string of gilded pelts: a $475 million Merrill Lynch settlement, $400 million from Marsh & McLennan and $725 million from the American International Group.

This is more from this article...

Oct 12, 2010 at 9:57 PM | Registered CommenterDailyBail
Are WSJ OpEd Writers Clueless or Liars?

Oct 12, 2010 at 10:00 PM | Registered CommenterDailyBail

Freddie, Fannie Threaten To Penalize Thousands Of Lenders Over Shoddy Foreclosures
Oct 12, 2010 at 10:01 PM | Registered CommenterDailyBail
"Ohio Attorney General Fights Against Wall Street"

Richard Cordray took over as AG after the various scandals of Mark Dann (D) http://marcdannresign.com/ , but his fight will probably be over very soon as they moneyed priests have aligned themselves with his opponent Mike Dewine (R ).

DeWine is a supporter of gun control laws and in 2004 co-sponsored an amendment to renew the ban on semi-automatic weapons. On July 29, 2005, he was one of only two Republican senators to vote against the Protection of Lawful Commerce in Arms Act, which banned lawsuits from being filed against gun manufacturers, distributors, and dealers for the misuse of their products.

Dewine was a member of the "gang of 14" and had been linked to Jack Abromoff.

Dewine supported the Private Securities Litigation Reform Act, which made it harder to bring suits to protect the pension systems against securities fraud.

DeWine joined 48 Republicans and 20 Democrats in the Senate. The legislation raised the burden of proof lawyers in private practice would have to show in cases of corporate fraud.

Oct 12, 2010 at 11:46 PM | Unregistered CommenterS. Gompers
It's all about the degradation of individual ownership. If the outcome serves economic justice at the same time it profits the money powers in the new regime, the true elegance of the CON is revealed.
Those who focus on the question of "ownership" are on the right track.
That track leads to this destination:
Oct 13, 2010 at 11:48 AM | Unregistered CommenterWil Martindale
Good post Wil.
Oct 13, 2010 at 12:13 PM | Unregistered CommenterS. Gompers
The government doesn't want this problem to be solved anytime soon. The government's problem right now is to slow down the rate of deflation of the housing bubble. There are too many foreclosures and housing prices are dropping too fast. This endangers the banks. If the pace of deflation can be slowed, then it can be compensated for by running a huge budget deficit. So, the policy is to keep the deflation of the housing (and financial) bubble down to a manageable 1.5 trillion per year. We have at least another 20 trillion to go, so that means huge deficits for more than a decade. So, I'm predicting that it will take more than a decade to sort out this mess - the government and the banks don't want it to be sorted out any earlier. As a result, many people may be able to continue to live in their house without paying the mortgage for the next decade....
Feb 23, 2011 at 10:07 PM | Unregistered CommenterLukas

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