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Nevada AG: Securitization Fail

posted by Adam Levitin

The Nevada AG is looking to reopen the 2008 AG settlement with BoA:  the AG alleges rampant and immediate non-compliance with the settlement.  The NYT coverage missed what is arguably the bigger story:  the Nevada AG came out and alleged a securitization fail.  The NY AG moved in this direction in his BNYM settlement action intervention, but was a little more oblique on that point. The Nevada AG minced no words

Bank of America misrepresented, both in communications with Nevada consumers and in documents they recorded and filed, that they had authority to foreclose upon consumers' homes as servicer for the trusts that held these mortgages.  Defendants knew (and were on notice) that they had never properly transferred [text redacted] these mortgage to those trusts, failing to deliver properly endorsed or assigned mortgage notes as required by the relevant legal contracts and state law. Because the trusts never became holders of these mortgages, Defendants lacked authority to collect or foreclose on their behalf and never should have represented they could.   

See also paragraphs 53 and 137-149. Amazing how the federal regulators missed all of this. Realize that it's been less than a year since the robosigning scandal broke and the chain of title issues started getting some attention. I expect we will see a lot more action on this front over the next year. Prosecutors, investors, and consumer attorneys are getting a lot more savvy about these issues, and it's getting harder and harder for the banks to dance around the problem.      


securitization flaws......one spoke in the wheel of the "GSE Business Model" which is fatally flawed.

Davet - this issue is specific to non-agency MBS. One typically does not find such "securitization fail" issues on agency MBS.


I enjoy reading your thoughts on this topic.

This is obviously a multi dimensional problem. I characterize it into two groups of problems - Little People problems and Big People problems.

Little People problems involve individual homeowners and mortgage servicers, or banks asserting a right to foreclose. They include claims of predatory lending and (conversely) of strategic default or deadbeat debtors, modification/foreclosure dual track policies, the deliberately poor customer service practices reported in the Nevada AG suit, actions taken against military personnel, and so on. When a media report can be illustrated by referring to one or more individual households, I think of it as an example of a Little People problem.

A Big People problem involves companies in the securitization chain, and typically takes the form of a request for a product recall - a claim by an investor or group of investors for relief because of bad practice by securities issuers, in the form of selection of mortgages, representation of performance, or conveyance of mortgages into a trust. Big People, critically, can afford expensive lawyers and have access to lobbyists and government representatives.

In both cases, for the most part we have lots of anecdotal evidence rather than comprehensive quantitative data on the amount and severity of issues. This is partly because regulators and law enforcement officials (State AGs, etc) have chosen not to seek a full evidentiary record before entering into settlement talks. And this (in my judgement) reflects a desire by authorities to protect banks from actions that might again cast doubt on their solvency.

The Little People problem is easier to describe to the general public, but IMV is less likely to have traction in the form of remediating action sponsored by states or the federal government. The Big People problem is much more likely, I think, to result in one or more court cases which expose banks to system threatening losses. Whether governments continue to protect banks after this, or do work towards settlements which honestly apportion remedies to homeowners, banks and investors, is the $64K (raised to several powers) question.

Ham Da, There is a great deal of evidence that agency MBS were as guilty of securitization fail as non-agency MBS.

In fact, there are many Fannie MBS that are simply made up of the senior classes of non-agency MBS.

A good example is here: http://www.foreclosurehamlet.org/profiles/blogs/one-big-ass-fannie-trust-9

Professor Levitin Wrote: "I expect we will see a lot more action on this front over the next year. Prosecutors, investors, and consumer attorneys are getting a lot more savvy about these issues, and it's getting harder and harder for the banks to dance around the problem."

I think you're expecting far too much to come from it. In the first place, the Federal Regulators (including the SEC and the IRS and bankruptcy trustees/DOJ) knew it had been going on for years, as did some large number of the Attorneys General.

I see nothing that would lead me to believe the dancing around the problem won't continue. It will continue to be presented as a simple paperwork problem that has been fixed. There is no compelling political reason to stop it and Washington doesn't have the stomach to prosecute members of the protected class.

Today's Wall Street Journal (Sept 1) runs a front page story of ousting of BNY Mellon CEO Robert Kelly. The story says the decision to let Mr. Kelly go "wasn't driven by any improprieties" and there, amazingly, is no mention of securitization fail or the counter claims leveled against BNY Mellon in AG Eric Schneiderman's motion to intervene in the now troubled $8.5 billion proposed settlement between Bank of America and 23 large investors.

I have to believe that this departure is at least partially connected to the recent revelations about BNY Mellon's role in failed note transfers to securitization trusts. The magnitude of this problem and the pressure brought to bear on Schneiderman by the Obama administration and the New York Federal Reserve Board to back off has been widely covered by Gretchen Morgenstern and Matt Taibbi. How is it that three reporters for WSJ can put out a front page story the same week and not even mention this explosive development?

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