There are 62 million completely and hopelessly invalid mortgages in the United States. The details are below but it is an increasingly evident fact that not one securitized mortgage originated from 2001 to 2008 was properly securitized, making the mortgage (the right to seize a home as collateral for the original loan) a legal nullity.
The short story is that every securitization—including Fannie Mae and Freddie Mac securitizations—requires the creation and funding of a securitization trust that must take physical possession and control of the trust property on or before the closing date of the trust. The securitization trustee is the sole and exclusive legal title holder of the thousands of promissory notes, original mortgages and assignments of mortgage. This transfer of the trust property, the legal res, to the trust at or around the loan origination is a necessary condition precedent to a valid securitization. It is necessary for several reasons.
First, someone must be the “legal” owner of the mortgage loan. Only the legal owner of the loan has the legal right to sell mortgage-backed securities (“MBS”) to investors. Second, actual physical transfer of ownership is necessary because the cash flows that go from the homeowner through the securitization trust to the MBS purchasers are tax exempt. If the trust does not perfect legal title by taking physical possession of the notes and mortgages, the Internal Revenue Code, specifically 26 U.S.C. § 860G(d)(1), provides for a 100 percent tax penalty on those non-complying cash flows. Third, the legal ownership of the loans must be “bankruptcy remote” that is, because bankruptcy trustees have the right to reach back and seize assets from bankrupt entities, the transfer to the trustee must be clean and no prior transferee in the securitization chain of title can have any cognizable interest in the loans. For this reason, all securitization trusts are “special purpose vehicles” (“SPVs”) created for the sole purpose of taking legal title to securitized loans and all securitization trustees represent and certify to the MBS purchasers that the purchase is a “true sale” in accordance with FASB 140.
But it never happened. It is all a fantasy. No securitization trustee of any securitized mortgage loan originated from 2001 to 2008 ever obtained legal title or FASB 140 “control” of any securitized loan. That is part of the reason FASB changed Rule 140 on September 15, 2008, on the eve of the financial meltdown.
SECURITIZATION IN A NUTSHELL
The securitization of a mortgage loan involves multiple parties. They are:
(1) the Borrower;
(2) the Original Lender (whomever is across the closing table from the Borrower);
(3) the Original Mortgagee (could be either the Original Lender or a “nominee” for the mortgagee, namely, Mortgage Electronic Registrations Systems, Inc. (“MERS”);
(4) the “Servicer” of the loan as identified in the securitization “pooling and servicing agreement” (“PSA”) (this is usually a bank or any entity with “servicer” in its name);
(5) the “Sponsor” is an entity identified in the PSA and the first link in the securitization chain of title between the Original Lender and the other parties to the PSA;
(6) the “Depositor” is the second link in the securitization chain of title and the entity between the Sponsor and the securitization Trustee;
(7) the “Trustee” is the sole and exclusive legal title owner of the securitized loan, the entity that must take physical delivery of the securitized notes and mortgages in order for the securitization to be valid, and the entity that issues MBS certificates to the purchasers of the MBS; and
(8) The MBS purchaser. This is the investor who buys MBS in reliance on the representations from the Trustee that the Trustee has valid legal title to the securitized notes and mortgages and who receives tax-exempt income from this investment.
There are three general types of securitizations.
The first is public securitizations. These are registered with the SEC. A typical PSA registered with the SEC is found here. The vast majority of public securitizations are governed by New York law. All public securitizations specifically require that the Trustee accept physical delivery of the securitized notes and mortgages prior to the “closing date” of the securitization trust. In the linked securitization, the “Series 2004-B Trust,” the definitions show that the closing date was February 26, 2004. Section 11.4 indicates that the Series 2004-B Trust is governed by New York law. Section 2.02 and Exhibit N show that the Trustee certified physical receipt of the notes and mortgages before the closing date.
The second is government-sponsored entity (“GSE”) securitizations. These are in two subcategories: Fannie Mae and Freddie Mac securitizations.
The actual securitization documents for Fannie Mae securitizations are not public. Fannie Mae, however, publishes its securitization forms here. For a single-family, fixed rate loan originated prior to June 1, 2007, the following “Trust Indenture” applies. According to section 12.04 of the Trust Indenture, Fannie’s rights are governed by District of Columbia law. As you can see from the Trust Indenture, Fannie acts as both the “depositor/custodian” (in trust law parlance, the “settlor”) and the “trustee.” Exhibit C at the end of the Trust Indenture is the “Custodial Agreement.” In the Custodial Agreement, Fannie represents, like the public securitization trustees referenced above, that it has received both the original note and fully executed assignments of mortgage prior to the “Issue Date” of the MBS.
Like Fannie Mae securitizations, Freddie Mac securitization documents are not public. Also like Fannie Mae, although it takes some navigating, Freddie Mac posts its securitization forms (“Seller/Servicer Guides”) here. Section 2(d)(3) of the Freddie Mac Seller/Servicer Guides requires that Seller/Servicer of a Freddie Mac deliver a fully executed assignment of mortgage from the Seller to Freddie Mac. Freddie Mac formerly published on its website a search tool that allowed the user to determine the date of the Freddie Mac securitization trust and the date Freddie Mac acquired the mortgage. Here is an example. Section 11 of the Freddie Mac Custodial Agreement provides that “United States” law, to be construed in accordance with New York law, governs Freddie Mac’s legal title to Freddie Mac securitized loans.
Finally, some securitizations are private and not accessible by any means short of litigation. The only available information about private securitizations will be in recorded documents in a foreclosure. An example here would be the “LSF7 NPL VII Trust.” This trust is a Bahamas trust with a mailing address located in Dallas, Texas. There is not much additional public information available about private securitizations and their trust documents.
Before discussing specifics of the above examples, it is important to provide a little background. The heyday of mortgage loan securitization was from 2001 to 2008. Evidence that securitization (and the private money printing that goes with it) got out of control is shown in the fact that the Federal Reserve stopped tracking M3 money supply in 2006, after the chart started to go parabolic. What this means is that the private money (a/k/a debt) creation of Federal Reserve banks became untethered in 2006, the height of the housing boom. Unsustainable mortgage loan securitization caused the financial collapse in 2007 and 2008. The resulting October 2008 bailouts funneled $16 trillion (and probably more) to MBS and MBS-insurance/derivative holders.
Although the October 2008 bailouts satisfied many MBS holders, perhaps multiple times, the bailout banks, Fannie Mae, and Freddie Mac added insult to injury by subsequently attempting to seize the collateral—the homes—securing the loans that had been satisfied or paid off. Just imagine that you borrow $100 in a Monopoly game, you fail to pay the $100, the “banker” prints the $100 you owe and gives it to himself, then demands the security you offered for the loan—your house on Park Place. That is what the October 2008 bailouts enabled.
The October 2008 bailouts were the proximate cause of the nationwide foreclosure fraud and “robo-signer” scandals. In 2010, Georgetown Professor Adam Levitin testified to Congress explaining the depth of the securitization chain of title problem and the potential for destabilization of the banking system. By April of 2011, every major national bank holding or servicing securitized mortgages (as well as MERS) had signed Consent Orders with the Office of the Comptroller of the Currency (“OCC”), admitting to “unsafe and unsound” banking practices relating to fraudulent foreclosure practices. These practices included hiring $10-an-hour third party contractors to pose as “Vice Presidents” of national banks in order to sign thousands of fraudulent foreclosure documents. Those April 2011 Orders can be found here. In July of 2011, Mortgage Electronic Registration Systems, Inc. (“MERS”), changed its rules, specifically Rule 8(e), to specifically require that future foreclosures be in the name of or at the express direction of the “note owner.”
Following the April 2011 OCC orders the bailout banks and the Federal Reserve attempted to sweep the securitization problem under the rug by offering an “Independent Foreclosure Review.” The bailout banks paid $3 billion dollars (between $1000 and $4500 per claim) to the victims of foreclosure. Several banks joined in an additional settlement with state attorneys general in a “National Mortgage Settlement” and paid another $2 billion. The average payout on these settlements was between $800 and $4000.
These settlements did nothing to solve the unsolvable problem of invalid securitized mortgages due to the securitization chain of title issues Professor Adam Levitin warned Congress about. Below is a post-mortem of typical foreclosure fraud for all three types of securitized mortgages.
In the example above, Wells Fargo Bank, N.A, as Trustee of the Series 2004-B Trust, claims to be the sole and exclusive owner of the securitized mortgage. If Wells is in fact the owner, it must have acquired legal title to the loan on or before February 26, 2004. New York law states that transfers to a trust after the closing date of the trust are void. N.Y. Estates, Trusts and Powers Law §§ 7-1.18, 7-2.4. Glaski v. Bank of America, N.A., 218 Cal.Rptr.4th 1079 (2013). See also, Saldivar v. JPMorgan Chase, 2013 WL 2452699 (Bky. SD Tex. 6/5/13) (holding that trustee mortgagee’s position is void if notes and assignments of mortgage not delivered within 90 day of closing of trust); Wells Fargo v. Erobobo, 2013 WL 1831799 (NY Slip Op. 4/29/13) (holding that NY trust law governs securitization and that notes and assignments of mortgage must be physically delivered to trustee within 90 days of closing for trustee to have claim of ownership). The Internal Revenue Code provides for 100 percent tax penalties for transfers to the trust after the closing date. So, if Wells Fargo cannot show physical receipt of the note and mortgage prior to February 26, 2004, its claim to the home is void. Similarly, if the only evidence Wells Fargo has of ownership is a document executed after February 26, 2004, its claim is void. Here is an example of such a document. It is an assignment of mortgage executed on May 26, 2010 (“5/26/10 AOM”) by Mary Kist in Dallas County, Texas. It is patently fraudulent. It was executed six years after the Series 2004-B trust closed. Every fraudulent securitized mortgage foreclosure has this smoking gun. There are millions of these recorded throughout the country.
According to Marie McDonnell of McDonnell Property Analytics, Mary Kist is a robo-signer. Ms. McDonnell’s thorough and pro bono analysis performed for the Essex, Massachusetts Register of Deeds is here. Mary Kist, sitting in Dallas Texas, had no factual knowledge of the contents of the 5/26/10 AOM and no legal authority to sign it. The fact that Wells Fargo had to go to Dallas, Texas to find someone to sign the 5/26/10 AOM when it is headquartered in San Francisco is powerful and dispositive evidence that it did not acquire legal title to the loan prior to February 26, 2004. These fraudulent assignments of mortgage exist in every securitized mortgage foreclosure. They are always executed years after the closing of the securitization trust and typically by someone who has no idea what they are signing. They are also always executed in a state a long distance from, and outside the subpoena power of, the state in which the foreclosed property is located.
The significance of the too late assignment of mortgage is this. Wells Fargo never acquired “legal title” to the securitized loan. This is an unfixable error. It also exposes the MBS holders to 100 percent tax penalties. Because of this, Wells Fargo, according the Erobobo, Salidivar and Glaski cases cited above, does not and cannot have “legal capacity” or legal “standing” to make a claim to the property. In short, the 5/26/10 AOM is irrefutable evidence that the Series 2004-B Trust is a “busted trust” with no identifiable owner of the mortgage.
Fannie Mae Securitization
Fannie Mae’s fraud differs from private securitization fraud. Although Fannie Mae is subject to the same trust rules and makes the same representations regarding physical receipt of securitized notes and mortgages prior to the “Issue Date” of the MBS, Fannie typically comes into record title after the foreclosure. In a typical Fannie case in Minnesota, an entity like Bank of America will conduct the foreclosure and then deed the property to Fannie Mae. Attached is a September 7, 2010 quit claim deed (“9/7/10 QCD”) from BAC GP, LLC to Fannie Mae relating to my home. As you can see, the “total consideration” for this transfer was “less than $500.” Jill Landeros, as “Assistant Secretary” of “BAC Home Loans Servicing, LP” executed the deed in New York. The 9/7/10 QCD claims, without any independent authority, that BAC GP, LLC is the “general partner” of BAC Home Loans Servicing, LP.
If this was done properly in accordance with the Fannie Mae Trust Indenture and Custodial Agreement above, Fannie Mae would have taken legal title to this loan in 2006 and would have in its possession the original note and fully executed assignment of mortgage dated sometime in 2006, the loan origination date and prior to the MBS Issue Date. For the same “busted trust” reasons cited above, because the 9/7/10 QCD is dated four years after last possible closing date of this securitization trust, Fannie Mae does not have legal title to this loan. Like the above example, the 9/7/10 QCD is powerful evidence that Fannie Mae never obtained legal title to this loan.
There are other nuances relating to Fannie Mae foreclosures, including the application of District of Columbia trust law and the occasional fraudulent assignment of mortgage to Fannie, but generally the above—bailout bank servicer with no right, title or interest in the loan conducts the fraudulent foreclosure and then deeds its interest to Fannie Mae—is how Fannie Mae illegitimately steals homes.
Freddie Mac Securitizations
These are virtually a carbon copy of the Fannie foreclosures above. Here is an example of a Freddie loan that closed on April 25, 2007. The Freddie Mac website shows that Freddie Mac “acquired” this mortgage on December 27, 2007. According to the Freddie website and consistent with New York trust law, this is the Freddie Mac securitization trust “settlement date.” Notwithstanding this, Freddie, like Fannie, usually comes in after a foreclosure via a quit claim deed or assignment of sheriff’s certificate of sale. For this loan, Freddie came into title by paying “less than $500” for a deed from Wells Fargo dated April 26, 2012 (“4/26/12 QCD”).
According to section 11 of the Freddie Mac Custodial Agreement, the laws of the United States, to be construed consistent with New York law, govern Freddie Mac securitizations. Since New York law is clear that post-closing transfers are void, any transfer to Freddie Mac after December 27, 2007 is void. So the 4/26/12 QCD to Freddie is void because it is over four years too late.
There is not much to say about private securitizations because they are difficult to crack. What is clear, however, is that the same principles above apply. All securitizations require the creation of a securitization trust and require that the mortgage loans be physically deposited into the trusts prior to the issuance of MBS. If they don’t, they are subject to 100 tax penalties and would violate the FASB 140 “true sale” and “control” rule. From this, we can deduce that no one would set up a securitization trust that would allow post-closing transfers to the trust. To do so would expose the MBS holders to 100 percent tax liability and be a violation of accounting rules relating to the transfer of financial assets. Here is an assignment of mortgage for a loan originated on September 25, 2005. The assignment of mortgage from MERS to “U.S. Bank Trust National Association, as Trustee for the LSF7 NPL VII Trust” is dated October 11, 2011, six years after the original securitization, and was signed by Patricia Seanz in Oklahoma. The LSF7 NPL VII Trust is a Bahamas trust that does not report to the SEC.
TIP OF THE ICEBERG
The “busted trust” is the root of all securitized mortgage problems. It is the reason why hundreds of $10 an hour minion robo-signers have signed millions of fraudulent and untimely assignments of mortgage and quit claim deeds, the reason for the OCC Orders, the reason for the $3 billion Independent Foreclosure Review and the reason for the $2 billion National Mortgage Settlement. It will be the reason for decades of quiet title litigation necessary to clean up the mess. This is because a busted trust creates many other irresolvable foreclosure problems. For example, if the trustee never acquired valid legal title of the debt instrument – the promissory note – and the trustee is the only possible legal owner of the note, how can anyone have the right to appear at a sheriff’s sale and bid “debt” due on the “note”? That’s just one of probably a half dozen fatal flaws in the foreclosure of a securitized mortgage.
Wall Street caused the financial meltdown of 2007 and 2008 by abusing its license to print debt for over a decade, and abusing Main Street in the process. In October of 2008, Congress and the President capitulated to Wall Street with $16 trillion in securitized mortgage bailouts. From 2008 to the present, courts have exacerbated the problem by enforcing clearly flawed securitized mortgages. This will be the cause of the next meltdown.