Yesterday’s post questioned why mortgage servicers–and not mortgage investors–were punished by the IFR. The reason for that question is this: servicers are supposed to be mere debt collectors. That is, servicers are not the entities to whom a debt is owed (they can be, but generally are not) and therefore, servicers supposedly only act to collect debts or foreclose on collateral as the agent of the entities to whom debts are actually owed. While this is more or less common knowledge and explanations of mortgage servicing can be found all over the Internet, I wanted to include one example of these myriad explanations just to illustrate that the above is not at all some misapprehension on my part of the facts. So here is an explanation in simple, direct language from the website of the San Francisco Chronicle:
“Mortgage servicers handle all customer service beyond just collecting monthly payments. While they do not own the loans, mortgage servicers are the borrower interface, answering questions, correcting posting errors, collecting past-due payments and coordinating loan modifications. Servicers, however, cannot usually make final decisions regarding changes in loan terms or foreclosure issues since they do not own the mortgages.”
Gotta love that–“customer service.” So the IFR punished the supposed “customer service” representatives of the mortgage business. To carry the analogy a little further and hopefully explain the question I’m getting at, does it make sense to punish the customer service reps at a business when the manager is the one who is embezzling funds? No, of course not. So again, why did the OCC want to punish the servicers and not the ones who supposedly control the servicers?
The real question
And because I have a bone to pick with them–and every taxpayer should have a bone to pick with them–my question really is this: why wasn’t Fannie Mae and its ilk punished? That is, why is there not a settlement or consent order with Fannie Mae and Freddie Mac as well as other supposed “investors” in so-called “mortgage loans?” Because after all, the foreclosures would have to have been ordered by Fannie/Freddie/investors because they were supposedly the principals while the servicers were merely their agents. And even if the so-called servicers screwed things up as alleged by the OCC/Fed in the settlement, the responsibility for those screw-ups ultimately lies with Fannie/Freddie/investors because the servicers supposedly work for Fannie/Freddie/investors. Right?
To go back to the retail analogy, if I manage or own say, a retail store, and my customer service reps keep overcharging people or stealing merchandise, aren’t I as the manager ultimately responsible? Shouldn’t I fire these bad employees of mine? Shouldn’t I, as manager/owner, at least take some sort of disciplinary or corrective action against my employees? Yes, of course. But Fannie/Freddie/investors did not punish their supposed employees, i.e., the servicers.
Foreclosures by Fannie/Freddie/investors are not legitimate
The IFR carried with it the unspoken presumption that the record number of foreclosures in 2009 and 2010 were legitimate and that the problem wasn’t so much that houses shouldn’t have been taken from people, it was more that the servicers fouled up the process of taking the houses using robo-signing, false affidavits, not having proper endorsements on notes, and so on. That’s the narrative that is being reinforced by the IFR.
But if the foreclosures were legitimate–i.e., Fannie/Freddie/investors (as opposed to the banks) actually did hold the notes–then why was all the false documentation necessary? Are we to believe that it was the servicers’ idea to try to take houses using false documentation and that Fannie/Freddie/investors had nothing to do with that?
Because as time goes on and information leaks out in dribs and drabs, we begin to see that the foreclosures at the supposed behest of Fannie/Freddie/investors weren’t legitimate to begin with, to say nothing of the nefarious/illegal actions of the servicers. And why weren’t the foreclosures at the behest of Fannie/Freddie/investors legitimate? Because Fannie/Freddie/investors did not hold the mortgage notes or the notes were not endorsed, and only holders of properly endorsed notes can enforce said notes per the UCC. I noted the inconvenient fact that the “investors” didn’t hold the notes yesterday in a link to a Living Lies article entitled “Empty Paper Bags: Loans Never Entered Pools” which discussed HSH v. Barclays in which HSH averred that 99% of the notes never made it into the trusts. HSH noted the ultimate problem with this scenario in its complaint, and this applies to all so called “investors,” whether it’s Fannie or Freddie or a private company like Bank of New York:
“3. Through investigation of a large sample of publicly recorded mortgage
documents, Plaintiffs have discovered that more than 99% of the mortgages in each of the three Securitizations were improperly or never assigned. In particular, many of these mortgages remain in the name of the loan’s originator or its nominee, and have never been assigned to the Trusts. While others were purportedly assigned to the Trusts, this was long after the securities were issued, contrary to the representations in the Offering Documents. Similarly, the promissory notes were not properly assigned in approximately 81.9% of the sampled loans.
4. The failure to timely assign mortgages to a RMBS trust hinders the trust’s ability to foreclose on the collateral –i.e., the mortgaged property – in the event of a borrower default. ”
Kemp v. Countrywide illustrates this
That little inconvenient fact could be seen even as far back as 2010, again with the justly well-known and widely-discussed case of Kemp v. Countrywide. In that case, Bank of New York was supposedly the “investor” in the Kemp loan. That is, Bank of New York supposedly held the Kemp note and was trying to enforce the note through foreclosure. The astute judge, however, pointed out that the note was unendorsed and therefore not payable to BONY and that the note had not been physically transferred to BONY. Are we to believe that BONY was not aware of those two facts? Not one person at BONY, not one database at BONY was apprised of the fact that BONY did not have a note that was not endorsed in the Kemp case? Why didn’t BONY just check with MERS, the fraudulent mortgage-industry database that’s supposed to keep up with all of this? The Kemp case did involve MERS, after all, as discussed in the article “Wall Street Rules Applied to REMIC Classification” by Bradley T. Borden and David Reiss, both professors at Brooklyn Law School: “On March 14, 2007, MERS assigned Kemp’s mortgage to Bank of New York as trustee for the Certificate Holders CWABS Inc. Asset-backed Certificates, Series 2006-8. The assignment purported to assign Kemp’s mortgage ‘[t]ogether with the Bond, Note or other obligation described in the Mortgage, and the money due and to become due thereon, with interest.’ That assignment was recorded on March 24, 2008. ” So Kemp won this case because BONY, the supposed investor, didn’t hold a properly endorsed note. Lest anyone think that Kemp is an isolated case, off the top of my head I can think of 3 lawsuits currently ongoing in which unendorsed notes and lack of transfer of notes–which constitute the extremely basic concept of “negotiation”–are an issue, and those are just cases in which I have personally spoken to the people fighting the banks. Wait, just remembered another one…this is a pervasive issue, to be sure.
The real reason the IFR was halted
The banks, as well as the OCC/Fed know very well that this is a pervasive issue, and said as much in the original consent order with Bank of America:
“…[Bank of America] litigated foreclosure proceedings and initiated non-judicial foreclosure proceedings without always ensuring that either the promissory note or the mortgage document were properly endorsed or assigned and, if necessary, in the possession of the appropriate party at the appropriate time.”
But notice that the 12 categories of harm in the IFR payout PDF did not include “investor ordering foreclosure did not hold note,” or “note was not endorsed to or held by investor,” which are two of the biggest reasons why foreclosures were illegitimate (and which again, was explained in a big way in Kemp v. Countrywide). Not that the 12 listed categories weren’t violations, but they weren’t the violations that if widely-known, would bring the mortgage industry and MBS market crumbling to the ground.
I am convinced that the reason the IFR was halted is because the reviewers–the “independent consultants” were finding that the notes were unendorsed and therefore not legally able to be held by Fannie/Freddie/investors. After all, if you’re reviewing a loan file, what’s the first thing you look at? The note (see for example Naked Capitalism‘s free e-book on p. 133)! And what are you looking for? An endorsement. And if there’s no endorsement, there’s no negotiation. And if there’s no negotiation, then Fannie/Freddie/investors do not hold the notes. And if Fannie/Freddie/investors do not hold the notes, then the “mortgage-backed” securities they issue or hold are worthless. And if the “mortgage-backed” securities are worthless, then that entire market is bogus. And if that entire market is bogus, we the taxpayers did not need to fund the bailout. And if that ever got out and became widely-known and understood, to quote Henry Ford (or at least a quote commonly attributed to him), “there would be a revolution before tomorrow morning!”
Fannie/Freddie/Investors have unclean hands
And that’s what I’m getting at: the hands of the “investors” are not clean, and I would argue based on the above, the investors’ hands are far dirtier than the servicers’ hands. But the servicers took the fall. Why? I don’t know for certain, but I think it is a cover-up of investor crookedness and illegality. So why would the OCC/Fed cover-up for the investors? I can’t say for sure, but my feeling is that there is some reason the OCC/Fed wants to divert attention away from MBS investors’ responsibility in all this. And that reason probably has something to do with the QE unlimited policy of the Fed, in which $40 billion/month of MBS is being bought by the Fed.
Or is it that the unlimited bailout of Fannie/Freddie has to continue in order to appease the Chinese, who are the largest holders of Fannie/Freddie MBS according to the most recent Report on Foreign Portfolio Holdings of U.S. Securities? Because China has and/or has threatened to dump dollars, and it is only through U.S. taxpayer-financed appeasement of China via Fannie/Freddie that the U.S. dollar is not dumped by China (although it has already been dumped in trade between China and Australia)? That the IFR and Fannie/Freddie bailouts are all a part of the larger currency war that is going on?
After all, China and the rest of the world are not stupid. You think they don’t know that the MBS are bogus for all the reasons stated above (and surely other reasons)? Of course they do. The question is, when will the American public admit that fact to itself?