By Roy Oppenheim and Jacquelyn Trask
( Roy Oppenheim is the co-founder of Oppenheim Law in Ft. Lauderdale, Fla. Jacquelyn Trask is an associate with the firm.)*
From 2003 to 2007, Florida saw the largest real estate boom in its history. Real estate sold at astonishing prices as people were sold a bill of goods known as the “American Dream.” But for many, that American Dream turned out to be the American Nightmare. From sub-prime mortgage lending and predatory practices by mortgage brokers, lenders and improper securitization of mortgages, this era of economic boom led to the largest crash in the history of the real estate market1, a crash from which Florida has yet to recover, and to which we have not yet seen the end. The full extent of the damage inflicted by these practices has not yet been felt, but millions of homeowners nationwide have suffered from financial crisis, foreclosure and bankruptcy. And what is worse yet is that the systemic fraud and illegal conduct of the banks has continued to pervasively infect court systems throughout the nation; further, the Florida court system has suffered from extreme abuse at the hands of the banks that have high jacked it and effectively turned it into a private collection agency for the banking industry.2
Mortgage securitization is perhaps one of the least understood areas of the real estate industry, and for good reason. With phrases such as mortgage bundling, securitized trusts, and tax-exempt structures known as Real Estate Mortgage Investment Conduits (“REMICS”), there are many terms employed to describe massive collections of bundled mortgages which were broken up and sold off in pieces. While this method of bundling mortgages was once looked at as perhaps the best thing to ever happen to the mortgage industry, allowing large scale investors such as pensions and retirement funds to own interests in mortgages in a way that was deemed “safe,”3 the securitization process has become a nightmare for the American homeowner fighting foreclosure. In fact, the securitization process has made it impossible in many, if not all cases where a mortgage is held in a securitized trust, to determine who actually owns a mortgage and note, a fact which until recently has done little to slow down the foreclosure rocket-docket.4
Perhaps the most confusing issue when dealing with securitized trusts and what those trusts mean with regard to foreclosure standing is understanding “securitization.”5 A simplified definition of securitization is that it is a “process where thousands of mortgage loans are bundled together into financial products called mortgage-backed securities.”6
In general, the securitization process and resulting trust are governed by what is known as a Pooling and Servicing Agreement (PSA), which sets forth the exact steps necessary for (i) a trust to be created, (ii) for the bundled mortgages to be transferred into the trust, (iii) for the issuance of securities by the trust to the depositor or on the open market, generally to institutional investors, and (iv) for the maintenance of the trust once created in order to maintain favorable tax status.7 In a foreclosure filed by a trustee on behalf of a securitized trust, the Pooling and Servicing Agreement is the key piece of documentation needed from the bank in order for the Judge to determine whether the trust owns the loan being foreclosed.8
Perhaps one of the most frustrating things about explaining securitization is getting people to understand that with the securitization process, the substance is the form.9 Often the general public does not understand that while it may seem trivial that person A signed the foreclosure documents and really person B should have, it is these distinctions that are crucial to proper securitization.10
During the robo-signing crisis in which the banks on Wall Street fraudulently “verified” millions of documents in order to fix their mistakes, some of the biggest names in the news media made light of the significant repercussions that such practices have for the history of the American legal and recording system.11 On October 9, 2010 the Wall Street Journal published an editorial titled “The Politics of Foreclosure.”12 The Journal’s editorial board wrote:
[t]alk about a financial scandal. A consumer borrows money to buy a house, doesn’t make the mortgage payments, and then loses the house in foreclosure—only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine? The affidavit was supposed to be signed by the nameless, faceless employee in the back office who reviewed the file, not the other nameless, faceless employee who sits in the front.13
The South Florida Law Blog published a response to this outlandish opinion, pointing out the extreme disregard this Wall Street Journal’s editorial board gave to the legal requirement of standing, and the consequences that such blatant disregard for our constitutional protections could have.14
Your editorial completely disregards an important constitutional concept of legal standing. Standing is the substantive due process notion of what a party must do in order to have the legal right to bring a legal action through our judicial system. Without the protective concept of standing, anyone could sue anyone at any time, ultimately causing legal anarchy. To fabricate standing, the banks used fraudulent assignments, bad notaries, and allowed for perjured documents to be presented to judges. The banks were forced to engage in such conduct because . . . the banks broke the mortgage into different parts, splitting the Note from the Mortgage by assigning the Mortgages to a third party (MERS) and selling the Notes to another entity. The Notes were than further sold off in traunches [sic] . . . Questions will be asked for a generation how banks literally hijacked the judicial system turning it into their own collection system while dispensing with the rules of law that have protected property right owners from the day our great nation was founded.15
The same argument is then made for a trust that missed the closing deadline, but got the assignment done eventually.16 The true question becomes, “where do we draw the line?” While the lenders who improperly securitized mortgages would love for the public and judiciary to believe that it is “close enough,” the whole point is that in securitization, close-enough just doesn’t cut it.17 As Professor Adam Levitin succinctly stated in his written testimony to the House Financial Services Committee Subcommittee on Housing and Community Opportunity:
Securitization is the legal apotheosis of form over substance, and if securitization is to work it must adhere to its proper, prescribed form punctiliously. The rules of the game with securitization, as with real property law and secured credit are, and always have been, that dotting “i’s” and crossing “t’s” matter, in part to ensure the fairness of the system and avoid confusion about conflicting claims to property. Close enough doesn’t do it in securitization; if you don’t do it right, you cannot ensure that securitized assets are bankruptcy remote and thus you cannot get the ratings and opinion letters necessary for securitization to work. Thus, it is important not to dismiss securitization problems as merely “technical;” these issues are no more technicalities than the borrower’s signature on a mortgage. Cutting corners may improve securitization’s economic efficiency, but it undermines its legal viability.18
Also noteworthy is that many of the big lenders who securitized mortgages, and the high-priced law firms who represent them, have internal documents discussing and warning of the repercussions of failing to properly securitize, and the impact that creating new assignments of mortgage could have.19 In October 2010, Citi published an internal document called Foreclosures Gone Wild.20 Summarizing a conference call, Citi stated:
It appears that in many instances during the mortgage securitization process over the past few years, the paperwork was not properly transferred. If the paperwork was not transferred in the legally required manner, it raises questions . . . about the validity and tax exempt status of the trusts in which the mortgages reside.21
Further, Citi pointed out that by attempting to fix the problems created by the bad transfers, the bank may have inadvertently provided proof that this argument is valid:
Banks have attempted to remedy the aforementioned problems by having employees sign affidavits that they have personal knowledge that the trust was once in possession of the necessary documents. Two problems have emerged with regards to these affidavits. First, several news stories have reported that the people signing these affidavits had no knowledge of the matters in question despite the fact that there [sic] were legally swearing that they did. Second, the affidavits may be irrelevant because the issue is not that the documents were lost but that they were never properly transferred at each step of the aforementioned securitization process.22
To test the theory that the securitization failure was systemic, Abigail Field with Fortune Magazine did a field study on hundreds of foreclosure documents.23 This study confirmed that this is a system-wide failure.24 The article was prompted following the deposition testimony of a former Countrywide employee who testified on the record that the trustee at the time of the foreclosure, and in fact since the origination of the loan, had never had possession of the note for a particular mortgage.25
On November 16, 2010, in response to numerous articles being published regarding foreclosure defense strategies including problems with securitization of MBS, The American Securitization (“ASF”) published an article in the ASF White Paper Series titled “Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Market.26 In an effort to repair the damage being inflicted by foreclosure defense attorneys and securitization experts who were attacking improper securitization methods, the ASF outlined the securitization industry’s position on why perfect securitization is not necessary to enforce a note and mortgage.27 The ASF cited alternative rules such as the Uniform Commercial Code (UCC) and common contract law, under which they argued their methods were more than sufficient.28
The largest problem with these arguments is of course the PSA, which governs and supersedes both the UCC and common law.29 The traditional rule has always been that parties are free to elect the law that applies to contract, and to contract around common law principles.30 Another interesting point is that the PSA was specifically designed to govern a securitized trust because contract common law combined with trust law is virtually indestructible when it comes to the intent of the parties to the contract, which in this case intended very specific rules of transfer.31 Combined, trust law and contract law set forth extremely rigid principals for the transfer of interests, requirements that are significantly relaxed under the UCC and other types of law over which the ASF is claiming control.32
One of the first courts to recognize the failure of the banks was Judge Christopher Boyko sitting in the United States District Court Northern District of Ohio Eastern Division in the case In Re Foreclosure Cases.33 At the time of the decision in 2007, securitization and the debate that raged between experts on both sides of the fence had not even reached the public forum.34 In support of his decision, despite conficting state decisions, Judge Boyko stated:
This Court acknowledges the right of banks, holding valid mortgages, to receive timely payments. And, if they do not receive timely payments, banks have the right to properly file actions on the defaulted notes—seeking foreclosure on the property securing the notes. Yet, this Court possesses the independent obligations to preserve the judicial integrity of the federal court and to jealously guard federal jurisdiction. Neither the fluidity of the secondary mortgage market, nor monetary or economic consideration of the parties, nor the convenience of the litigants supersedes those obligations . . . [u]nlike . . . [s]tate law and procedure, as plaintiffs perceive it, the federal judicial system need not, and will not, be “forgiving in this regard.”35
Bankruptcy courts in several states were the next to begin seeing through the banks’ veiled efforts to establish standing when it did not exist.36 In one such case, In re Kemp,37 the court considered whether the proper steps were taken in securitizing the underlying mortgage for purposes of expunging the trustee’s proof of claim.38 Quoting the PSA for the underlying securitized trust, the opinion entered by the court notes that the PSA recital of the transfer required:
[T]he original Mortgage Note, endorsed by manual or facsimile signature in blank in the following form: ‘Pay to the order of _____________ without recourse,’ with all intervening endorsements that show a complete chain of endorsement from the originator to the Person endorsing the Mortgage Note.” PSA §2.01(g)(i) at 56. Most significantly for purposes of this discussion, the note in question was never endorsed in blank or delivered to the Bank of New York, as required by the Pooling and Servicing Agreement.39
At the trial, a new undated allonge was produced purporting to meet the requirements of the PSA.40 Further, during deposition testimony given by a former bank employee, the court noted that the testimony showed a failure to properly transfer physical possession of the note to the trustee.41 Applying state law, the bankruptcy court held that because the trustee never had possession of the note, they could not sue to enforce its obligations as the owner and holder in due course.42 Furthermore, because the note was not properly endorsed under the guidelines set forth in the PSA, and the allonge never properly attached to the note, all requirements for a proper transfer had failed.43
Like the statement made by Judge Boyko in recognizing the rights of a lender, this article does not deny, by any means, the right of a mortgage lender to foreclose on borrowers who have failed to meet their financial obligations. It is intended, however, to elucidate for fellow attorneys and members of the judiciary that while these financial obligations exist, so do the legal protections of our judicial system that were instituted to protect the property rights of Americans that are rooted in the United States and Florida State Constitutions. The judicial system was never meant to be evaluated by how swift justice could be dispensed or by how quickly a particular judge could dispose of cases on his or her docket. As officers of the court, both judges and attorneys are responsible for protecting the integrity of the system, ensuring that the system is never compromised solely for financial expediency.
Unfortunately, for the past several years it is as if the Florida judicial system had adapted a set of “lore” that was not rooted in any legal construct. The standing issue concerning securitized trusts is particularly glaring since it has been argued tens of thousands of times in judicial chambers throughout the state with courts, for whatever reason, turning a deaf ear and a blind eye on these fundamental issues.44 We will not attempt to address the conflicting motivations that allowed this unfortunate set of events to have occurred, but it is clearly one of Florida’s judicial branch’s darkest hours. We are encouraged, as a profession, by the new case law developing in Florida that would suggest the judiciary has finally seen the light, and that homeowners may finally see foreclosure by the proper lender, in compliance with their due process and constitutional rights.45 In the long run, ensuring the integrity of the system will preserve the judiciary and will re-establish respect for the judicial system.
* Real estate attorney Roy Oppenheim started his legal career as an associate at two top Wall Street firms, first at Milbank, Tweed, Hadley and McCloy and later White and Case. But he left Wall Street for Main Street, co-founding Oppenheim Law in Fort Lauderdale, Florida in 1989, where he remains Senior Partner. Roy’s practice focuses on real estate law, foreclosure defense and commercial litigation.
He started the South Florida Law Blog in 2009, which was voted the best business and technology blog of 2011 by the South Florida Sun-Sentinel. Today, Oppenheim is a sought-after legal expert on issues relating to the real estate crisis and beyond. He can been seen in Yahoo! Homes as a guest contributor, and Roy has also been featured in publications such as the Huffington Post, Sun-Sentinel, New York Times and the Wall Street Journal.
Jacquelyn Trask joined Oppenheim Law as an associate attorney in 2012 after spending two years working for the firm as a law clerk. Trask specializes in foreclosure defense and real estate transactions as well as litigation, employment and contract law. She graduated in the top 2% of her law school class, earning summa cum laude honors from Nova Southeastern University. While earning her JD Jacquelyn earned seven book awards for excellence in academics and served as an articles editor to the Nova Law Review.
1 Roy D. Oppenheim, Florida Housing Crisis Worse than Great Depression?, South Florida Law Blog, June 16, 2011, http://southfloridalawblog.com/2011/06/16/from-bad-to-worse-securitized-trusts-face-scrutiny-and-housing-crisis-now-worse-than-the-great-depression/ (last visited Sept. 30, 2011). As of June 2011 home prices had fallen more than 33 percent, 2 percent lower than the hit the market received in the 1930s. Id. In addition, prices in South Florida have likely not hit their low, as thousands of foreclosures continue to occur, home prices could decrease an additional 10-15 percent. Id.
2 Roy D. Oppenheim, Roy Oppenheim to the Wall Street Journal: “Your Editorial will make future investors think twice about entire system,” South Florida Law Blog, Oct. 19, 2010, [hereinafter Roy Oppenheim to the Wall Street Journal] http://southfloridalawblog.com/2010/10/19/roy-oppenheim-to-the-wall-street-journal-%E2%80%9Cyour-editorial-will-make-future-investors-think-twice-about-entire-system%E2%80%9D/ (last visited Sept. 30, 2011); Roy D. Oppenheim, Foreclosure Jurisprudence, The Florida Bar News, July 1, 2011; Jose Pagliery, Canady Returns to Well to Replenish State Courts, Daily Business Review, A1, Sept. 30, 2011.
3 Ironically, these securities were deemed safe because they had Triple-A ratings (similarly to U.S. Treasury bills). Now, neither have Triple-A ratings due in part to the imploding economy caused by the financial crisis. Had these securities never been given inflated Triple-A ratings, the entire crisis may have been averted.
4 This failure prevented homeowners and the government from creating a true solution to the crisis through mortgage modifications by making it so unclear as to who owned the mortgages that investor approval could never be obtained. On the other hand, title underwriters seem to ignore the issue and gladly write title insurance over foreclosed properties that may not have a clear chain of title.
5 Although “securitization” is one process, the ramifications and intricacies are different depending on whether one is addressing it from a foreclosure defense standpoint, tax standpoint, or seeking loss mitigation alternatives as a borrower. For a detailed explanation of securitization as it relates to problems with loss mitigation, consult Adam Levitin and Tara Twomey, Mortgage Servicing, Yale J. on Reg. 11, 28−31 (2011).
6 Bitner, Confessions of a Subprime Lender: An Insider’s Tale of Greed, Fraud and Ignorance 23, 23–24 (2008).
7 Adam Levitin and Tara Twomey, Mortgage Servicing, Yale J. on Reg. 11, 31−32 (2011).
9 See Adam Levitin, Written Testimony Before the House Financial Services Committee Subcommittee on Housing and Community Opportunity, at 3, November 18, 2010 [hereinafter Written Testimony] (“Securitization is the legal apotheosis of form over substance, and if securitization is to work it must adhere to its proper, prescribed form punctiliously.”).
10 See Editorial, supra n. xi (stating sarcastically that “[t]he affidavit was supposed to be signed by the nameless, faceless employee in the back office who reviewed the file, not the other nameless, faceless employee who sits in the front”).
11 See Editorial, The Politics of Foreclosure, Wall St. J. (Oct. 9, 2010) (available at http://online.wsj.com/article/SB10001424052748704696304575538440995389092.html) (noting that President Obama refused “to sign a previously noncontroversial measure to have states recognize notarized documents from other states”).
14 Oppenheim, Roy Oppenheim to the Wall Street Journal, supra.
16 See Levitin & Twomey, supra at 14 n. 35 (stating that transferring a mortgage loan to a “trust after the REMICs closing date” will result in a loss of REMIC status).
17 SeeWritten Testimony, supra at 3 (“Securitization is the legal apotheosis of form over substance, and if securitization is to work it must adhere to its proper, prescribed form punctiliously.”).
19 Citi, Foreclosures Gone Wild, October 12, 2010; see Milton A. Vescovacci on behalf of Akerman Senterfitt, Servicing Real Estate Mortgage Investment Conduits in U.S. Mortgage Securitizations, Akerman Senterfitt (2006) (discussing these firms and internal practices).
20 Memo. from Citi, supra at 1.
23 Abigail Field, At Bank of America, More Incomplete Mortgage Docs Raise More Questions, http://finance.fortune.cnn.com/2011/06/03/at-bank-of-america-more-incomplete-mortgage-docs-and-more-questions/ (posted June 3, 2011, 11:49 a.m. ET).
25 Transcr., Kemp v. Countrywide Home Loans (In re Kemp), at 14:14–25 (Aug. 11, 2009) (440 B.R. 624 (Bankr. D. N.J. 2010)).
26 The ASF White Paper Series article was presented along with the testimony of Tom Deutsch, the Executive Director of the American Securitization Forum to the House Financial Services Committee Subcommittee on Housing and Community Support, and was offered to rebut the testimony of Adam Levitin, who testified before the subcommittee early in the week and offered his own written testimony in support of his arguments against the securitization practices used by the banking industry and supported by the ASF.
27 ASF White Paper Series, Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Market 1, http://www.americansecuritization.com/uploadedFiles/ASF_White_Paper_11_16_10.pdf (Nov. 16, 2010).
28 Id. at 5.
29 Written Testimony, supra at 23.
33 No. 1:07-cv-2282 et al. (E.D. Ohio 2007) (detailing the preeminent bankruptcy proceeding to determine that the banks had not properly shown that they had standing to bring the action).
34 Robert J. Coughlin, Caught in the Cross-Fire: Securitization Trustees and Litigation during the Subprime Crisis 2, Nixon Peabody LLP, http://www.nixonpeabody.com/linked_media/publications/securitization_litigation_subprime_crisis.pdf (Sept. 18, 2009).
35 Id. at 4. Judge Boyko included a footnote concerning his decision that notes the condescending manner in which the plaintiffs and their counsel expected the court to fall in line:
Plaintiff’s “Judge, you just don’t understand how things work,” argument reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process . . . financial institutions . . . rush to foreclose, obtain a default judgment and then sit on the deed, avoiding responsibility for maintaining the property while reaping the financial benefits of interest running on a judgment . . . [t]here is no doubt every decision made by a financial institution in the foreclosure process is driven by money. . . . Unlike the focus of financial institutions, the federal courts must act as gatekeepers . . . [c]ounsel for the institutions . . . utterly fail to satisfy their standing and jurisdictional burdens. The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance.
Id. at 5 n. 3.
36 Coughlin, supra n. xxxiv, at 3–4.
37 Kemp v. Countrywide Home Loans (In re Kemp), 440 B.R. 624 (Bankr. D.N.J. 2010).
38 Id. at 625 (explaining that the debtor was challenging the creditor’s enforcement of the obligation due to improper endorsement).
39 Id. at 627.
40 Id. at 628.
42 Id. at 634.
43 Id. at 633–634.
44 In 2008, the Author appeared before a particular court in defending a foreclosure, at which time the judge was rubber stamping hundreds of uncontested summary judgments. Counsel remarked to the judge that in many of those cases, the bank did not establish the necessary predicate for filing foreclosures based on issues of standing and other legally required foundations. The court asked if the Author was representing the defendants in those files, and the Author said he was not. The Author then suggested to the court that his honor had sworn the judicial oath of office, including to uphold the Code of Judicial Conduct, which in relevant part requires a judge to “respect and comply with the law and shall act at all times in a manner that promotes public confidence in the integrity and impartiality of the judiciary.” FL ST CJC Canon 2(A). The court then said to counsel that if he continued in that line of discussion that he would be held in contempt of court. Interestingly enough, this judge has recently stepped down to accept a position at a Florida foreclosure mill.
45 See U.S. Const. art. XIV, § 1 (declaring that no state shall “deprive any person of life, liberty, or property, without due process of law”).