November 13, 2017
Trustees & Servicers are destroying shareholder value by acting against behavior defined in the PSAs for their own private benefit. Agency problems continue to incentivize cheap, fraudulent document management processes and inefficiency over investor value.
In over 30% of the cases examined, the trustees did not begin foreclosure actions until more than six months after the loan default dates.
In 85% of the cases examined, the trustees filed the foreclosure complaints with an allegation that the original notes had been lost, stolen or destroyed.
The courts dismissed nearly 20% of the cases for lack of prosecution after the trustees failed to take any action within twelve months.
Of 1,476 cases, none correctly disclosed the date that the trust acquired the loan and mortgage.
Of 1,476 cases, none correctly identified the entity that transferred the loans and mortgages to the trust.
When the economy imploded in 2008, investors learned that their investments in mortgage-backed trusts were not nearly as secure as they had been led to believe. The loan quality in the thousands of loan pools was much riskier than disclosed. Properties were over-priced, over-appraised and sold to borrowers who often were unqualified and borrowing 100% of the purchase price.
Loan quality was only part of the problem. Investors also learned that trustees and mortgage servicers often did a very poor job of pursuing foreclosures on behalf of investors. Delays and incompetence [i] caused significant losses for the investors.
After a mortgagor of a trust-owned mortgage defaulted, the trust was almost always responsible for taxes, insurance, maintenance, homeowner’s association fees, attorney’s fees and increased servicer fees. These expenses were rarely recovered when the foreclosures were completed and the properties resold. Diligence in pursuing foreclosures was of critical importance in minimizing losses because the real estate market fell significantly month-by-month for several years from 2007-2010, but the trustees very often failed to produce the loan documents needed to move cases forward to conclusion.
A review of every case filed by five major trustees in July 2008 in four counties in Florida, shows that all five had a significant problem with delays in filing after loans defaulted. The cases were filed by Bank of New York, Deutsche Bank National Trust Company, HSBC Bank USA, U.S. Bank and Wells Fargo Bank, acting as trustees. These trustees regularly failed to file for foreclosures until 6 to 18 months after the loan default date even though the cases did not involve modifications. U.S. Bank and Bank of New York were the worst performers, filing fewer than 58% of their cases within 6 months of the default.
Missing loan documents caused significant delays after the case was filed. In 85% of the cases examined, the complaints were filed with allegations that the original note had been lost, stolen or destroyed. In almost all of these cases, the trustees later claimed that they found the original notes, but there was a delay of 12-24 months between the loan default date and the date the loan documents were found and filed. Even after the original notes were allegedly found and filed, many of these notes lacked endorsements of any kind. The missing notes, endorsements and assignments were a significant cause of long foreclosure delays, as well as outright denial of foreclosures.[ii] The cases lingered until the documents were finally produced and the trustees moved for Summary Judgment. In many cases the “original notes” that were eventually produced were actually copies.[iii] The loan documentation problem was so severe in Florida that the Florida Supreme Court amended the Rules of Civil Procedure in 2010 and in 2014 to address the issue of properly setting out the ownership and location of the notes.[iv] New York state’s court system also enacted a requirement in 2010 requiring attorneys to certify under penalty of perjury that they had communicated with a representative of the plaintiff bank or lender and that they had personally reviewed all documents and records related to the case.
Late filing of loan documents contradicted the document management process set out in the governing agreements for mortgage-backed trusts. The Pooling and Servicing agreement for almost every trust provided that in the event of a loan default, the servicer would send a form requesting the original mortgage documents to the trustee so that the documents could be used to foreclose. The trustee had a specific duty set out in Section 3.19 of most Pooling and Servicing Agreements to cooperate and produce the mortgage files with the original documents within three business days by sending the documents by overnight mail.
The trust itself was never the original lender and the note only identified the original lender in most cases. There was nothing on the note itself that showed the relationship between the original lender and the trust because the endorsement on the note was missing or was an endorsement in blank. In the foreclosure complaints the trustees usually alleged only that “the plaintiff owns and holds the note” sometimes adding “by virtue of an assignment to be recorded.” This failure of the trustees to demonstrate or allege how and when the trusts acquired the loans and mortgages was discussed in two federal court decisions in the Northern District of Ohio early in the foreclosure crisis. On October 31, 2007 Judge Christopher Boyko dismissed 14 foreclosure cases because none of the documents submitted by the trustees identified the plaintiff/trust as the original mortgage holder or as an assignee as of the date the foreclosure complaint was filed.[v] Two weeks later, Judge Kathleen McDonald O’Malley followed Judge Boyko’s reasoning and concerns and dismissed 32 foreclosure actions for lack of standing, ruling:
…a foreclosure plaintiff…especially one who is not identified on the note and/or mortgage at issue, must attach to its complaint documentation demonstrating that it is the owner and holder of the note and mortgage upon which suit was filed. In other words, a foreclosure plaintiff must provide documentation that it is the owner and holder of the note and mortgage as of the date the foreclosure action is filed.[vi]
Judge O’Malley also warned that an affidavit alone, in which the affiant simply attested that the plaintiff was the owner and holder of the note and mortgage, was insufficient and that the appropriate documentation included assignment documents executed [vii] before the foreclosure action was commenced.
Mortgage Assignments, however, were usually not available because the governing agreements for almost every trust provided that no mortgage assignment would be obtained in cases where the mortgage was registered on the Mortgage Electronic Registration System. When these “MERS mortgages” defaulted, many trustees, servicers and their lawyers, produced mortgage assignments to satisfy judges. These assignments almost always misstated the date that the trust acquired the mortgage and note, and usually showed the loans being assigned directly from the loan originator to the trust, when the loans had actually been assigned from the originator to another entity, the depositor for the trust. In many cases, the assignments showed the loans being transferred years after the trust closing dates and after the foreclosure had already been filed even though acquisition of defaulted loans was not permitted under the trust agreements.
With their 2007 decisions, Judges Boyko and O’Malley fired a shot heard around the banking and securities worlds. This battle over loan documents presented by trustees in foreclosures raged on in almost every state for five years following the Ohio decisions and eventually caused changes in the rules of civil procedure in state courts and calls for a streamlined foreclosure procedure in state legislatures. Despite the considerable publicity surrounding the Ohio decisions[viii] and similar decisions in Massachusetts[ix] and New York[x], trustees continued to file complaints with the bare allegation that “the plaintiff owns and hold the note.”
1,476 foreclosure cases filed in July 2008 in four Florida counties were reviewed to determine the length of time between the loan default date and the filing of the foreclosure complaint. The cases selected were all the foreclosure cases filed by Bank of New York, Deutsche Bank National Trust Company, HSBC Bank USA, U.S. Bank and Wells Fargo Bank acting as trustees for mortgage-backed trusts from 7/1/2008 to 7/31/2008. The complaints were examined to determine the loan default date, the length of time between the default and the foreclosure filing, whether the complaint was filed with an allegation that the original note had been lost, stolen or destroyed,
whether the date of the transfer of the note and mortgage was specifically alleged and whether the transferee was identified. The loan files examined were from Brevard, Palm Beach, Sarasota and Volusia counties in Florida.
Of the 1,476 cases, 85% (1,251) were filed with allegations that the original note was lost, stolen or destroyed. 31% of the cases were not filed until more than six months after the loan default date. None of the cases correctly stated the date that the loans and mortgages were transferred to the trust. None of the cases correctly identified the depositors, the entities that transferred the loans to the trusts. Over 20% of the cases were eventually dismissed by the courts for lack of prosecution, failure to take any action in 12 months.
[i] The trust was often misidentified. Foreclosures were often brought in the name of the original lender even though that lender had sold the loan to the trust years earlier. Even the lawyers representing Deutsche Bank often claimed their client was “Duetsche Bank” or “Deusche Bank.” One law firm representing Morgan Stanley identified their client as “Mortgage Stanley.”
[ii] Most of the cases involving missing notes or endorsements resulted in denial of Summary Judgment. In many cases, the complaints were dismissed without prejudice, allowing the banks to refile with proper loan documentation. There were a few cases where the exasperated judges dismissed cases with prejudice. These cases received much attention in the press with the result often described as a “free home” for the borrowers.
[iii] The actual notes in many cases were likely destroyed as the Court observed in the FHFA v. Nomura Holdings America, 104 F.Supp.3d 441, 453 (S.D.N.Y. 2015):
During the relevant period, documents were frequently received in paper form and then scanned to convert them to digital images, but this conversion might not occur until after the origination process. Some originators created and relied on electronic loan files.
The Florida Bankers Association submitted comments to the Florida Supreme Court in 2009 regarding possible amendments to the Florida Rules of Civil Procedure. The comments confirmed that the original loan documents were routinely scanned and destroyed:
The reason “many firms file lost note counts as a standard alternative pleading in the complaint” is because the physical document was deliberately eliminated to avoid confusion immediately upon its conversion to an electronic file. See State Street Bank and Trust Company v. Lord, 851 So. 2d 790 (Fla. 4th DCA 2003). Electronic storage is almost universally acknowledged as safer, more efficient and less expensive than maintaining the originals in hard copy, which bears the concomitant costs of physical indexing, archiving and maintaining security. It is a standard in the industry and becoming the benchmark of modern efficiency across the spectrum of commerce—including the court system.
This representation of the Florida Bankers Association conflicted with the representations in thousands of cases that the original documents were supposedly subsequently found.
[iv] There were two major revisions to the Florida Rules of Civil Procedure. The amendment to Rule of Civil Procedure 1.110(b), effective February 11, 2010, added a specific verification requirement to all residential mortgage foreclosure complaints. In the Administrative Order enacting the rule change, the Supreme Court announced that the primary purposes of this amendment are (1) to provide incentive for the lender to appropriately investigate and verify its ownership of the note or right to enforce the note; (2) ensure that the allegations in the complaint are accurate; (3) to conserve judicial resources that are currently being wasted in inappropriately pleaded “lost note” counts; and (4) to give trial courts greater authority to sanction plaintiffs who make false allegations. The rules were amended again, effective December 11, 2014. Under the most recent amendment, Rule 1.115 requires an allegation in the complaint that the claimant is the holder of the original note secured by the mortgage. Along with the complaint, the holder must “contemporaneously” file a certification of possession of the original promissory note, under penalty of perjury, with copies of the original note attached. Rule 1.115(c), Fla. R. Civ. P. The certification must set forth the location of the note, the name and title of the person making the certification, the name of the person who personally verified such possession, and the time and date on which possession was verified.
If the mortgagee seeks to enforce a lost, destroyed or stolen instrument, the claimant must specifically allege, under penalty of perjury, the chain of assignments or transfers giving rise to the claimant’s rights to enforcement the instrument.
[v] In re Foreclosure Cases, 2007 WL 3232430 (N.D.Ohio, Oct. 31, 2007).
[vi] In re Foreclosure Actions, 2007 WL 4034554 (N.D.Ohio, Nov. 14, 2007).
[vii] The requirement that the assignments were to have been executed before the complaint was filed would seem to make assignments insufficient where the effective date was stated to be retroactive to the actual execution date or where the effective date was stated to be “on or before” the filing date. Both of these practices were widespread on mortgage assignments executed from 2007 through 2010.
[viii] See, e.g., Gretchen Morgensen, “Foreclosures Hit a Snag for Lenders,” New York Times, November 15, 2007; “Subprime’s Paper Trail Proves To Be An Obstacle,” Reuters, November 15, 2007; and Peter G. Miller, “The Real Foreclosure Crisis: Who Owns the Mortgages?” Huffington Post, October 12, 2010.
[ix] Massachusetts Bankruptcy Court judges were particularly critical of loan documents presented by trustees and servicers. Six months before the Ohio decisions, Massachusetts Bankruptcy Judge Joel B. Rosenthal wrote a decision in In re Schwartz, 366 B.R. 265, (Bankr.D.Mass. 2007), a case brought by a mortgage servicer, HomEq, for a trust with Deutsche Bank National Trust Company as trustee and First NLC as the loan originator. Jude Rosenthal observed that: “When HomEq was required to prove its authority to conduct the [foreclosure] sale, and despite having been given ample opportunity to do so, what it produced instead was a jumble of documents and conclusory statements, some of which are not supported by the documents and indeed even contradicted by them.” The following year, Massachusetts Bankruptcy Judge Joan N. Feeney in a case involving Argent Mortgage Company, AMC Mortgage Services and Deutsche Bank National Trust Company as Trustee for Argent Mortgage Securities Trust 2004-W1 ruled that Deutsche Bank failed to adequately trace the loan from the original lender to itself: “The mortgage lender, its affiliates, assignees, and agents involved in this case, through the convoluted process of securitization, the submission of a 191-page, incomplete PSA, and reliance upon back-dated, unrecorded assignments, have confounded the identity of the current holder of the mortgage for the purpose of filing the Motion for Relief from Stay, as well as the proof of claim.” In re Hayes, 393 B.R. 259 (Bankr.D.Mass. 2008). Judge Feeney ordered Deutsche Bank to show cause as to why they should not be sanctioned for filing without competent evidence that they had standing.
[x] New York State Supreme Court Justice Arthur M. Schack was one of the most outspoken critics of the claims, practices and documents of securitized trusts in decisions that were especially scathing. He began pointing out failures in the bank/trustees claims and proof in early 2007. In Deutsche Bank v. Castellanos, Kings, Index No. 22375/2006 (11 May 2007), Judge Schack noted regarding Deutsche Bank and Goldman Sachs: “When these financial giants moved to foreclose on the defendant’s subprime mortgage loan, it appears that they neglected to see who actually owns the mortgage loan.” Other cases where Judge Schack found that the banks documents failed to establish that the banks owned the mortgages include Deutsche Bank v. Harris, Kings County, Index No. 35549/2007 (05 Feb 2008), where Judge Schack wrote: “Further, this Court requires an explanation from an officer of plaintiff Deutsche Bank as to why, in the middle of our national subprime mortgage foreclosure crisis, Deutsche Bank would purchase a non-performing loan from IndyMac and why Deutsche Bank, IndyMac and MERS all share office space at 460 Sierra Madre Villa, Pasadena, California 91107.” See, also Bank of New York v. Orosco, 2007 NY Slip Op 33818 (U) (N.Y. Misc. 2007); Deutsche Bank v. Clouden, Index No. 277/07 (N.Y. Sup. Ct. Kings Co. 2007); Deutsche Bank v. Ezagui, Index No. 03724/2007 (21 Sep 2007); Deutsche Bank v. Grant, Kings County, Index No. 39192/2007 (25 Apr 2008); and Deutsche Bank v. Maraj, 2008 NY Slip Op 50176 (U) (N.Y. Sup. Ct. Kings Co. 2008).