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NY AG Unsheathes Excalibur

posted by Adam Levitin

NY AG Eric Schneiderman came out with guns blazing in the proposed Countrywide investor settlement litigation.  It his filing intervening in the action and suing Bank of New York Mellon for breach of fiduciary duty, persistent fraud, and violations of the Martin Act (the "Excalibur" of the NY AG), General Schneiderman didn't mince words.  He explained that the loan transfer documentation for lots and lots of mortgages is FUBAR and that servicers and their vendors are trying to fraudulently paper over the problems (spiced, I might add, with a healthy dose of legalese):

One of BNYM’s primary obligations as trustee under these PSAs wasto ensure the proper transfer of loans from Countrywide to the Trusts.  The ultimate failure of Countrywide to transfer complete mortgage loan documentation to the Trusts hampered the Trusts’ ability to foreclose on delinquent mortgages, thereby impairing the value of the notes secured by those mortgages.  These circumstances apparently triggered widespread fraud, including BoA’s fabrication of missing documentation.  

And how about this one:

Any action to foreclose requires proof of ownership of the mortgage.  This must be demonstrated by actual possession of the note and mortgage, together with proof of any chain of assignments leading to the alleged ownership.  Moreover, complete mortgage files give borrowers assurance that their  properties are properly foreclosed upon.  The failure to properly transfer possession of complete mortgage files has hindered numerous foreclosure proceedings and resulted in fraudulent activities including, for example, “robo-signing.” These fraudulent activities have burdened borrowers as well as the courts with flawed foreclosure proceedings.   

BNYM is putting on a brave face, but I don't see how they have a leg to stand on in this.  The last thing they really want to do is go to the mat on whether the loan documentation is up to snuff.  It ain't.  The only questions are when they settle on this, what terms the settle on, and whether they can settle by themselves, without pulling CW/BoA into the deal.  And if that happens, it sets the floor for settlements with the other major servicers.  

I should mention that this is hardly the first time the NY AG has had to clean up the mortgage trustee business.  In the 1920s and 1930s, the NY AG had to deal with mortgage guarantee certificates (an early sort of securitization) that featured rampant fraud and real estate bond houses, which again featured rampant trustee fraud (using principal payments from one bond to hide defaults on interest payments on others, etc.)  The result was eventually the Trust Indenture Act of 1939.  Guess what the TIA doesn't cover?  MBS. Maybe it's time to change that.  Rep. Brad Miller has legislation (H.R. 1783) that would do just that.  


Adam. There is one Lone Ranger - Guns Blazin. Wow. Is it courage? Is it moral responsibility?

Or is it just because he not only understand the laws as written in the Constitution and echoed in the State Governments? Is it because NY along with the rest of the USA has shuddered with predatory lending, Fraud perpetrated on its people, both homeowners, and investors alike. Nearly smoothed over by the politicians whos very reelection is funded by their closed eyes.

I sure wish the AG's across the country along with my own would stand up and take note. JUSTICE need not be blind and deaf when the Law is the Law . Or is law only law for us commoners?
Excalibur - Slices through Iron as if it was wood. Dont Mess with Texas? ?????

Hi Professor
Here's my take on Schneiderman's filing: http://abigailcfield.com/?p=224

My big question now is: When are the suits coming against Deutsche Bank, US Bank, Wells Fargo, JPMorgan Chase, and any other trustee of meaningful size. I mean, they all have done what BNY did, except for the self-serving settlement negotiation part.

Abigail Caplovitz Field

Professor, there is a flaw in General Schneiderman's assertion:

"This must be demonstrated by actual possession of the note and mortgage, together with proof of any chain of assignments leading to the alleged ownership."

That position has been only recently-embraced by the courts but there is still a tendency to accept sworn affidavits.

This will continue, mainly because the DOJ is not going to prosecute anyone of significance for directing employees to counterfeit documents or forge signatures.

The allegations against BNYM seem fairly straightforward to prove. In which case, why should Schneiderman pursue a settlement rather than a criminal conviction and a revocation of their bank charter? It would be an excellent test of the Dodd-Frank resolution provisions before they get used on BofA...

I agree with you - Schneiderman has opened Pandora's box with respect to mortgage transfer and chain of title issues, and it will be difficult for the banks to stuff these issues back in the box. There were several other interesting things about the NYAG's Petition, many of which are detailed on my blog here: http://t.co/08JHQsh.

I was curious about your thoughts regarding whether this Petition would dynamite the entire settlement. At the very least, it should cause Judge Kapnick to conduct a deeper investigation into, and possibly force BoNY to return to the drawing board on, its "reasonable" loss estimate. That is, if the Trustee's experts did not conduct any investigation into the size and scope of mortgage transfer issues, how could they assess the reasonable value of settling and releasing those claims?

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