So if any of us can stand yet more commentary on the So-Called Independent Foreclosure Review (SCIFR), I have a question–why were only the “servicers” punished? Why weren’t the holders and/or owners of the notes punished? After all, the servicers are supposedly merely agents of the holders/owners of the notes and as such, the servicers are legally unable to act without direction from the holders/owners of the notes, who are supposed to be the principals in this supposed principal/agent scenario.
Well, there are essentially two possibilities: 1) there are no principals in this scenario–or the purported “servicers” are the purported “principals” (see below) or 2) the OCC and the Federal Reserve are covering up for the GSEs (Fannie and Freddie) and the big banks that supposedly issued the so-called private-label mortgage-backed securities (MBS)–this point will be covered tomorrow in Part Two of this discussion.
The target of the SCIFR
First, let’s examine exactly who was targeted by the SCIFR. In an OCC press release (dated February 28, 2013) announcing the settlement that ended the SCIFR, we find this sentence:
“The Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board today released amendments to their enforcement actions against 13 mortgage servicers for deficient practices in mortgage loan servicing and foreclosure processing.”
There you have it, straight from the source–the SCIFR did not go after the supposed note holders or note owners, i.e. the principals, it only went after the servicers, i.e., the agents.
Now, I have no desire to get too deep into the weeds on agency law here (and I am not a lawyer), so let me try to be succinct. In every case I have ever read (including my own), the servicers claim that they are but agents of their principals and that their principals are the holders (and/or owners) of the promissory notes, and that anything the servicers do is and legally must be at the behest of and with direction from their principals (i.e., the noteholders). Judges also acknowledge this in every case I have read. In fact, here is a short and sweet explanation of this matter by two judges from a 2009 article entitled “Where’s the Note? Who’s the Holder?“:
“But, the servicing agent does not have standing, for only a person who is the holder of the note has standing to enforce the note. 1See, e.g., In re Hwang, 2008 WL 4899273 at 8. [NOTE: Hwang was reversed by the district court in 2010, because even though the note had supposedly been sold to Freddic Mac, IndyMac still had physical possession of the note, which actually proves the point of this article, which is further fleshed out below; the reversal of Hwang did not challenge or change the principle mentioned directly above that only a holder can enforce–it confirmed that principle.]
The servicing agent may have standing if acting as an agent for the holder, assuming that the agent can both show agency status and that the principle [sic] is the holder. See, e.g., In re Vargas, 396 B.R. 511 (Bankr. C.D. Cal. 2008) at 520.”
So there you go–a servicer is an agent, a holder is a principal, and the agent cannot act without the direction of the principal. That means that the final SCIFR settlement was the equivalent of punishing the contract killer but not the person who hired him. Or does it? I ask that because what I believe to be happening here is that the SCIFR is actually a tacit admission of either (or both, if that’s even possible) of the following: 1) the servicers are the “principals” (while pretending to be mere agents), which lends great credence to the argument of Matt Weidner and Max Gardner that the standard Fannie/Freddie promissory notes are in fact non-negotiable and therefore no “securitization” (i.e., selling notes into the “secondary market”) ever took place, or 2) that “securitization fail” is a reality, meaning that Fannie, Freddie, and the private-label would-be securitizers never actually took the notes by transfer and/or that the pools are empty because the purported pools of promissory notes that make up the MBS actually have nothing in them.
On this last point, I want to specifically quote from Neil Garfield of Living Lies:
“…the loans were NOT pooled, bundled or put into any trust. That means the entire securitization chain is a scam, supporting a Ponzi scheme that should result in criminal prosecutions.”
And Garfield’s support for this statement is from the April 2012 complaint in HSH v. Barclays—that would be the same Barclays that in July 2012 (obviously only a couple months after being sued by HSH) admitted it participated in rigging LIBOR–in which Plaintiff HSH avers that:
“62. Both investigations have independently revealed that over 99% of the mortgages and notes were not properly and/or timely assigned to the RMBS Trusts.“
And therein lies (pun intended) the principal/agent scam, which is essentially that there are no “principals,” (i.e., “note holder”) telling the “agents,” (i.e., “servicer”) to foreclose on properties. That is to say, if anyone holds the notes, that would be the servicer/banks themselves, not some MBS trust or MBS pool (as noted above, see the 2010 district court decision which reversed Hwang). But the servicer/banks usually claim that they don’t hold the notes–they say that Fannie/Freddie and/or private-label MBS trusts (typically and collectively referred to as “investors”) hold the notes!
So what does all this mean?
So in this first part of this two-part argument, we can surmise that the SCIFR did punish the right culprits, i.e., the 13 banks (i.e., Aurora, Bank of America, Citibank, Goldman Sachs, HSBC, JPMorgan Chase, MetLife Bank, Morgan Stanley, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo) that claim to be mere “servicers,” or agents, of other entities, i.e., “the investors” despite the fact that these 13 bank/servicers did not transfer the notes to the trusts as discussed above. And if these 13 banks are the right culprits (and I believe they are), then great, they at least got a slap on the wrist.
But that means that a much bigger can of worms has yet to be opened, because if the 13 banks were the right culprits in the foreclosure fraud that has been ongoing for several years, what does that mean for the status of “the investors?” That is to say, courts have been operating under the presumption (having been led to this presumption by the 13 banks/servicers) that investors held the notes, but as discussed above, the SCIFR is a tacit admission that the 13 banks/servicers–and not the investors–held the notes and therefore necessarily acted independently of any supposed investor/principal in foreclosing on properties. So the bigger can of worms is gigantic and means that there are no MBS, there are no trusts/pools, the bailouts of Fannie and Freddie were completely unnecessary (because there are no MBS or trusts/pools), and that the Fed’s QE unlimited program is completely unnecessary and fraudulent because there are no MBS on which to spend $40 billion per month for the foreseeable future. This will be taken up tomorrow in Part Two of this discussion.