Ginnie Mae, Fannie Mae, Freddie Mac — All Financed through "Securitized" Trusts

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See MidFirst Bank v Haynes 893 F.Supp. 1304 (1994)

It is always interesting to see how Federal Judges in particular take a closer look at a case when the stakes are higher. Here we have 17 properties. And instead of leading with the usual recitation about the origination of the loans, this Federal Court in Oklahoma introduces the premise of the case with an acknowledgement that loans involving Government Sponsored Entities (Ginny, Fannie, Freddie, et al) are financed not by the GSE but by the sale of mortgage backed securities. The GSE serves in one of two capacities: guarantor and/or Master trustee of a REMIC trust. Those who allow the bank to stonewall them with the assumption that the buck stops with the GSE are neither getting it right nor presenting it right.

This court was not presented with the anomaly that that the money from investors never made it into the trust and neither did the loans (because there was no money to pay for the loans). That is a line of attack that is difficult to get traction on even now. Many decisions are coming out of all sorts of courts in which the court is unconvinced that the player pretending to be the lender, holder or servicer or trustee has any right to be making such claims and fails to meet its burden of proof (prima facie case).

“This action involves a dispute regarding the ownership of, and right to proceeds payable under, seventeen mortgage notes originally executed in favor of defendant C.W. Haynes & Company, Inc. (“Haynes”) as mortgagee. The mortgage notes were secured by mortgages on the mortgagors’ residences, all of which are located in South Carolina. Haynes sold the mortgage notes to Inland Mortgage Company (“Inland”) who thereafter placed the mortgage notes in a “pool” of mortgage loans backing a security to be issued by Inland and guaranteed by the Government National Mortgage Association (“GNMA”) under its mortgage backed securities program.”

“Without paying Haynes for the mortgage loans, [e.s.] on October 25, 1990, Inland placed the mortgage loans in a pool of mortgages to obtain a Government National Mortgage Association (“GNMA”) mortgage-backed security. On that same day, Inland sent the mortgage documents (indorsed in blank) to Bank of America, the document custodian, who then examined the documents and certified to GNMA that they complied with GNMA regulations. Included in the documents was an executed original Form HUD-11711B signed by an Inland officer certifying to GNMA that:

‘No mortgage in the referenced pool or loan package is now subject to any security agreement between the issuer and any creditor, and upon the release (delivery) of securities backed by the pool or loan package, only GNMA will have any ownership interest, other than nominal title, in and to the pooled mortgages.'”

[In exchange for a fee] “Inland and GNMA entered into a Guaranty Agreement which specified that it became effective on November 1, 1990, the “issue date” for the security [e.s.]. Pursuant to the Guaranty Agreement, Inland transferred and assigned to GNMA all of its right, title, and interest in and to the mortgages backing the security, effective on the date of the delivery of the GNMA guaranteed security. In return, GNMA guaranteed the timely payment of the principal and interest set forth in the security to be issued under the Guaranty Agreement.”

The Court goes into a more exhaustive analysis of the business records exception to the hearsay rule than we normally see when there is one under-resourced homeowner against a trillion dollar bank or its nominee:

“…the date on which the security was delivered by GNMA is of significance in determining whether GNMA qualifies as a holder in due course of the mortgage notes. [e.s.] For this reason, before the court may properly address the substantive legal issues presented, it is necessary to decide a threshold evidentiary issue. Haynes argues that the records of Participants Trust Company (“PTC”) (which establish the actual delivery date of the security as November 9, 1990), are inadmissible hearsay. Haynes asserts that the records of PTC are replications of information sent to it by Chemical Bank.

Federal Rule of Evidence 803(6) provides an exception to the hearsay rule for the following:

‘A … record, or data compilation, in any form, of acts, events … made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the … record, or data compilation, all as shown by the testimony of the custodian or other qualified witness, unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness.'”

The Court decided in favor of admission of the computer reports. And you might see this case cited in briefs filed by attorneys fro the banks. But if you read the decision carefully you might find there is more in this case for your position than the other side. The records, simply stated, are subject to the test of reliability and credibility. If the corporate representative of the party who was introducing the records was shown to have an economic interest in the outcome of the case and a history of bad behavior, the court might have decided otherwise. Importantly, the Court starts with the fact that there was a contractual relationship between the company offering the evidence and the prior parties.

In the case of most individual foreclosure actions, the “party” who is offering the records is someone new to the scene who had nothing to do with the prior events in which the loan was originated, or how the loan documents and payments were transferred, processed and eventually enforced. What is happening in these cases is that the banks are taking advantage of the law relied upon by this federal Judge to get in documents that would otherwise would NOT be admissible because the actual parties involved have conflicting stories. (This is comparable to non-judicial states in which the non judicial process is manipulated to get a foreclosure sale that would never be allowed if the party had filed a judicial foreclosure. The “substituted” parties are not subject to questioning nor discovery without the borrower filing an action for Temporary restraining Order in which the burden is on the borrower to prove his theory of the case by first denying allegations that have never been made.)

The Court’s reliance on its perception of the fact pattern in this case led it to the conclusion that the records should be admitted. In mot cases I would argue that the the absence of the actual records custodian, the absence of proof as to how the records were created and maintained, the interest of the witness (a professional witness with no job description other than testifying), the interest of the company for whom he or she is testifying (contractually distancing the servicer from the true facts of origination, transfer and fictitious sales of the debt) all contribute to a conclusion that such records should not be permitted as evidence; BUT if you don’t do it in discovery and move to block the evidence in limine you are not likely to get any traction, even if the Judge thinks you MIGHT be right that the records are neither reliable nor credible.

”

Chemical Bank and PTC have a contractual arrangement whereby Chemical Bank provides PTC with the data shown on the transaction journal which is input for PTC by Chemical Bank’s employees. Mr. Celifarco with PTC testified that PTC’s computer records were based entirely on the records of Chemical Bank and that he did not know how Chemical Bank’s computer records were produced. Mr. Celifarco’s deposition reveals that PTC relies on the data in the ordinary course of its business, that the record was made at or near the time of the transaction, that the record was transmitted by a person with knowledge, and that it is the regular practice of PTC to make these records.

Mid-First argues that the transaction journal meets the requirements of Rule 803(6) regardless of whether it was prepared by a PTC employee or a Chemical Bank employee. Business records of an entity are admissible even though another entity made the records, and the rule does not require an employee of the entity that prepared the record to lay the foundation. United States v. Childs,5 F.3d 1328, 1333 (9th Cir.1993) (“Exhibits can be admitted as business records of an entity, even when that entity was not the maker of those records, so long as the other requirements of Rule 803(6) are met and the circumstances indicate the records are trustworthy.”), cert. denied, ___ U.S. ___, 114 S.Ct. 1385, 128 L.Ed.2d 60

[893 F.Supp. 1311]

(1994); United States v. Jakobetz,955 F.2d 786, 801 (2d Cir.1992) (“Even if the document is originally created by another entity, its creator need not testify when the document has been incorporated into the business records of the testifying entity.”); Saks Int’l, Inc. v. M/V “Export Champion”,817 F.2d 1011, 1013-14 (2d Cir.1987) (“Documents may properly be admitted under this Rule as business records even though they are the records of a business entity other than one of the parties, and even though the foundation for their receipt is laid by a witness who is not an employee of the entity that owns and prepared them.” (citations omitted)); Mississippi River Grain Elevator, Inc. v. Bartlett & Co.,659 F.2d 1314, 1319 (5th Cir.1981) (Rule 803(6) does not require the documents be prepared by the testifying business. (citing United States v. Veytia-Bravo,603 F.2d 1187, 1191-92 (5th Cir.1979), cert. denied, 444 U.S. 1024, 100 S.Ct. 686, 62 L.Ed.2d 658 (1980))).

Moreover, Rule 803(6) does not require the testifying witness to have personally participated in the creation of the document or to know who actually recorded the information. United States v. Keplinger,776 F.2d 678, 693 (7th Cir.1985). “Obviously, such a requirement would eviscerate the business records exception, since no document could be admitted unless the preparer (and possibly others involved in the information-gathering process) personally testified as to its creation.” Keplinger, 776 F.2d at 694. Rather, the business records exception requires the witness to be familiar with the record keeping system. Id.; see also United States v. Hathaway,798 F.2d 902, 906 (6th Cir.1986). The phrase “other qualified witness” should be broadly interpreted. 4 JACK B. WEINSTEIN & MARGARET A. BERGER, WEINSTEIN’S EVIDENCE ¶ 803(6)[2], at 803-196 to – 198 (1994).

Haynes further argues that computer records require additional foundation for admission such as evidence regarding the original source of the computer program used to produce the records and procedures for input control. In support of its position, Haynes cites United States v. Russo,480 F.2d 1228 (6th Cir.1973) and United States v. Scholle,553 F.2d 1109 (8th Cir.1977). Haynes’ reliance on these cases is misplaced. In Russo the court recognized that the business records exception should be liberally construed to avoid the former archaic practice of requiring authentication by the preparer of the record. Russo, 480 F.2d at 1240. In discussing computer printouts, the court noted that modern businesses rely largely upon computers to store large quantities of information, and such information is admissible so long as it is trustworthy and reliable. Id. at 1239-40.”

Lastly the Court  takes up the HDC argument, in which Haynes argued that the HDC doctrine should no longer be applied — a position that lies at the base of all foreclosing parties where their are claims of securitization. Article 3 UCC governs who and how a party can enforce a note. The source of authority can only come from the owner of the debt. Through an authentic instrument of authorization any party may become a holder with rights of enforcement if they get that right from the owner of the debt. The owner of the debt is supposed to be a Holder in Due Course (HDC). If you look at the elements of any Pooling and Servicing Agreement it is impossible to conclude otherwise.  But the investment banks made certain that the actual words (Holder in Due Course”) were never used. Nevertheless the requirements in the PSA spell out exactly what Article 3, UCC provides for a holder in due course. And the investment banks that excluded the term “HDC” did so precisely because they knew they were going to defraud the investors (see yesterday’s post).

“Haynes argues that UCC Article Three should not apply in this case because the rationale underlying the good faith purchaser for value concept (embodied in Article Three as holder in due course) no longer applies in modern day transactions. Haynes contends that this protection is unnecessary in modern day transactions because a merchant can “require the strictest accounting from the person from whom he is receiving the instrument.” (Haynes Memorandum at 24.) However, Article Three of the UCC controls transfers of negotiable instruments, and the mortgage notes are clearly negotiable. If UCC Article Three should not apply in this case and the holder in due course doctrine is no longer warranted, then any abolishment of that body of law should come from the legislature, not the court.”

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