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AT LEAST 30% OF ALL LOAN FILES ARE MISSING KEY DOCUMENTS

EDITOR’S NOTE: With fund managers facing questions about what they are doing to mitigate the damages from the fake securitization debts of all types, and facing questions about how they got involved investing pension money in the scam to begin with, they are now seeking cover under the umbrella of litigation against the investment banks.

Legally, this raises an interesting specter and the effect on even the fabricated transfer documents. If the “put-back” nuclear option is now coming into full bloom then it highlights an important legal fact: the loans were never endorsed without recourse and were never intended to be indorsed without recourse. And  to the extent that settlements have been reached, there is the problem of how to account for the balance of the individual loans supposedly in those pools and how to account for ownership of the loans.

Then there is this other nagging problem: since it was money from pensions vested to working people that funded the pools from which the bankers took their bonuses and funded some loans, and since some of those same pensioners are in foreclosure, how do we deal with the fact that they essentially loaned the money to themselves (without knowing it) and now they are losing their homes because the intermediaries ran off with the money?

The writing is on the wall — the number of people electing a strategic default (stopping payment on their mortgage) — is increasing at a geometric rate. The most common thread when I speak to the strategic defaulters is a simple business decision — the house is so far underwater that there is nothing else to do but walk away, or stay in the house as long as possible without a payment (and recover some of their investment).

So the fund managers are looking not only on at those mortgages that were foreclosed or are “in default” but at the number of mortgages and other types of debts that were “Securitized” and seeing Black Friday. Our computations here show that the best case scenario for the average homeowner is that if they entered into a loan transaction after 2001, the home is on average 30% underwater, once you take all the expenses of sale, commissions and other fees into account. for many who put a down payment of 20% or more, this is a hard pill to swallow, as it increases their loss from 30% to 50%. There are several areas in the country that we have direct evidence of 70% losses, not including down payment losses and other money invested into home improvements.

For many people this represents a loss of several hundred thousand dollars and they know they will never get it back by holding onto their home and high mortgage payments based upon a value for the property that was not sustainable. As seen in the recent Citi case with investors, they were only interested in closing the deal. They would say anything they had to say in order to achieve that objective because of the out-size fees and out-size resulting bonuses they received. Most of these loans were worth substantially less on the day of closing than the amount that the nominal principal stated on the note. Most of them have title and lien perfection problems that takes the value of the loan down even further.

Meanwhile it is becoming increasingly evident that the investment banks, as intermediaries, and the MBS Trustees and even some fund managers are avoiding their responsibilities to mitigate losses. In fact the investment banks and the other participants in the securitization chain, have taken the opportunity to worsen damages for investors and borrowers because they have written into their securitization documents fee structures that actually eat up ALL the equity in the property, leaving the investors and borrowers with nothing. Eventually that means decreasing the pension benefits upon which many retired people depend.

Why litigation can never resolve MBS put-back crisis

On Wednesday, the bond insurer Syncora filed its latest brief in its three-year-old litigation with Countrywide over $6 billion in Syncora-insured securities backed by Countrywide mortgages. Like its fellow bond insurer MBIA, Syncora was quick to assert claims that Countrywide breached the representations and warranties it made about underlying mortgage loans. Syncora’s lawyers at Debevoise & Plimpton sued Countrywide way back in 2009. Since then, according to a Sept. 16 Countrywide brief, Bank of America has spent millions of dollars locating, processing, and producing documents to Syncora. In the first round of discovery, the bank produced 18 million pages on the 114,000 loans underlying the five offerings at issue in the case. After New York state supreme court judge Eileen Bransten ruled that Syncora can rely on a statistical sample of underlying loans and Syncora identified a representative sample of 2000 mortgages, Countrywide ran a second, court-ordered sweep of its files and produced thousands of hard-copy archives on each of those 2000 loans.

Nevertheless, Countrywide and Syncora have only just begun their fight over missing documents in the loan files. Rememer, this particular fight isn’t about what the scores of pages in each loan file say about the underwriting on each individual underlying mortgage. This is a fight simply over missing pages. Countrywide and Syncora engaged in full-on briefing and oral argument over which side bears responsibility for identifying the missing documents. Then, after the judge said complete document production was Countrywide’s problem and Countrywide found a batch of documents that supposedly filled loan file gaps, Syncora protested that the discovery came too late.

Countrywide believes that Syncora intends to argue that any missing document amounts to a breach of Countrywide’s reps and warranties. Syncora’s response, filed Wednesday, is unfortunately sealed, although Syncora’s final summary judgment brief isn’t. Syncora has asked Judge Bransten for a declaratory judgment that it doesn’t have to show reps and warranties breaches were responsible for defaults on underlying mortgage loans in order to demand Countrywide buy back the deficient loans. That low standard would make the pending issue of whether a mere missing document amounts to a breach all the more important.

To understand why it’s so hard to assemble the underlying loan files, I talked Thursday to the head of mortgage operations at a company that evaluates mortgage loans for both banks and MBS plaintiffs in connection with reps and warranties claims. Typically, he said, his company receives pdf or tif images, either directly from a bank or mortgage originator or from a plaintiff’s discovery. Through at least five successive rounds of review, his teams log what’s in the files-which average 200-220 pages-and identify what’s missing. “It’s a mess out there,” he said, explaining that at the height of the housing boom, mortgage originators were simultaneously writing loans as fast as they could and switching from paper to electronic recordkeeping. Sometimes the loan files are incomplete because lenders didn’t conduct adequate underwriting, he said. More often they’re incomplete because of paperwork snafus.

Documents are missing from about one-third of the loan files his teams have reviewed. Typically, his company contacts mortgage lenders to ask them to search for the specific missing information, and usually, he said, the banks find it once they know what they’re looking for. Only when his company has done all it can to put together the missing pieces does he check for errors in the files. And then, he said, his group has found an average error rate of 60 percent.

I asked whether it was fair for plaintiffs to foot the bill when his company calls mortgage lenders to ask about missing documents. He agreed that it’s not, that banks should be searching for files on their own. “We shouldn’t be doing their job for them,” he said. “Plaintiffs shouldn’t be paying for it.”

Let’s step back for a second, though, to think about the implications of the sort of effort his company pours into assembling and reviewing individual loan files. Syncora’s Countrywide case is relatively small by MBS standards, and the judge overseeing it has approved sampling. There are still 2,000 loan files (comprising at least a dozen documents and scores of pages) at issue. Extend that sampling rate across pending reps and warranties claims, and assume that both sides in each case are doing the sort of re-review my mortgage friend describes. They have to: Depending on how Judge Bransten rules in the Syncora and equally ripe MBIA cases against Countrywide, banks could end up liable for every loan file that’s missing a document.

Now imagine that Bank of America’s proposed $8.5 billion reps and warranties settlement falls through. And imagine that, as I’ve predicted, securitization trustees and MBS investors step up their breach of contract demands. We’re looking at breathtaking legal fees and costs. If you’re a lawyer working on either side of the MBS litigation or a business specializing in re-underwriting mortgage loan files, maybe that’s a good thing.

But if you’re just someone wondering how the economy can recover with MBS liability looming overhead, it’s definitely not.

(Reporting by Alison Frankel)

Follow Alison on Twitter: @AlisonFrankel

Follow us on Twitter: @ReutersLegal

Tags: bankruptcy, borrower, countrywide, disclosure, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, LOAN MODIFICATION, modification, PUT BACK CLAIMS, quiet title, rescission, RESPA, securitization, TILA audit, trustee, WEISBAND, WITH RECOURSE
Posted in bubble, Corruption, Eviction, securities fraud |