Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Bill
My PSA requires:

     SECTION 2.01. Conveyance of Mortgage Loans.

 

     (i) In connection with such assignment, the Depositor does hereby deliver to, and deposit with, the Trustee or the Custodian, the following documents or instruments with respect to each Mortgage Loan so assigned that is not a Co-op Loan:

 

          (A) The original Mortgage Note endorsed in blank or, "Pay to the order of LaSalle Bank National Association, as trustee, without recourse" together with all riders thereto. The Mortgage Note shall include all intervening endorsements showing a complete chain of the title from the originator to [____________________] or "Pay to the order of LaSalle Bank National Association, as trustee, without recourse";

 

Am I not understanding this?  I am reading this as:

 

1.  The note can be endorsed in blank or to the trustee.

 

2.  There has to be an endorsement from each entity in the securitization process showing a chain of title to the trust.

 

 

What are your thoughts on this?  Is this normal wording in everyone's PSA?  Is this binding on the trust?   


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William A. Roper, Jr.

Bill:

Professor Adam LEVITIN has made precisely this argument.  He argues that this or similar language in many trust agreements/PSAs REQUIRES the identification of the intermediate holders by specific intervening indorsements.

This is NOT a requirement of the UCC.  Blank indorsements have been around for centuries.  There is nothing unusual or sinister about blank indorsements.

Whether the identified language REQUIRES intervening indorsements or simply requires that there be a complete chain of valid indorsements WHEN INDORSEMENTS ARE MADE remains an unsettled question.  I am UNAWARE of ANY court case nationally holding that Mr. LEVITIN's interpretation is the correct one.

I think that this is a TERRIFIC argument which probably OUGHT TO BE MADE.  But I also doubt that it will prove to be a winning argument for several reasons.

One problem is that in interpretting contracts, courts heavily rely upon the intention of the parties.  Intention can be obtained from the testimony of the parties themselves and/or from surrounding environmental evidence, such as industry custom and practice.  The custom and practice has been to use blank indorsements.

I am UNCERTAIN how far back this custom goes within the mortgage industry, but I can tell you first hand that it absolutely WAS the custom as to both FNMA and FHLMC loans in the mid 1980s when I was in the mortgage business.  Every mortgage investor we did business with required indorsement in blank almost twenty five years ago.  And that custom has been unchanged.

So if a trial were to be held to ascertain the intentions of the parties with respect to the language shown, I think that ALL of the parties to the PSA, as well as the available truthful testimony from others within the industry will inform the court's decision that no matter how inartfully worded the section is, that the intention of the parties was that the instruments would be indorsed in blank and that negotiation as between intermediate parties would be effected by physical delivery.

*

There are two groups aguing in favor of the LEVITIN interpretation.  These two groups are (a) mortgage foreclosure defendants, who see the lack of intervening indorsements as a means of showing a failure to transfer the collateral into the trusts and (b) investors in the mortgage trust certificates.

But neither of these groups was in privity of contract to the PSAs.  Though the trust certificate holders are beneficiaries of the trust and certainly may have valid standing to raise such a question, the critical question is NOT what the certifcate holders thought the language meant, but rather what those signing the agreement thought it meant.

*

But if this argument can be used to raise a disputed fact question, this MIGHT preclude grant of a summary judgment!  If I was litigating in a judicial foreclosure state and had a trust indenture/PSA which included such language, I would definitely include this argument in my defense.  Similarly, I might dance this argument out if I was defending in a bankruptcy setting.  As a practical matter, I do NOT expect this argument will ultimately prove to be a winning argument and I believe that within eighteen to twenty four months you will probably see a series of persuasive decisions which find that no intervening indorsements are necessary in consideration of this PSA language. 

*

Also, though there is much public discussion and even some poorly worded court decisions otherwise, notes are not assigned.  Mortgages and deeds of trust are assigned.  Negotiable instruments are negotiated.  While there are many forged assignments which purport to assign the "note, bond and indebtedness", only a lawful negotiation actually transfers the interest and vests in the transferee the holdership of the instrument.  Negotiation is by indorsement and delivery.

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bill
If state law for the trust and the PSA require certain transfers how do you get around that?  Something has to bind the trustee's actions.  I'm not a party to the PSA agreement but that and State law show the requirements for the trust to aquire assets.   If there is no proof of deliver/negoation of the note and no recordings as required by state law would this make an arguement that would preclude SJ?       

Am I even going the correct direction???? 

thanks for the help.
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William A. Roper, Jr.
Bill:

I DO think that there are some rather obvious PROBLEMS with the PSA language.  First, consider the sentence:

"The original Mortgage Note endorsed in blank or, "Pay to the order of LaSalle Bank National Association, as trustee, without recourse" together with all riders thereto."

Elsewhere within the PSA, there is probably a description of precisely what is to happen to the mortgage collateral at the closing of the trust.  In most trusts, this will involve the sale and negotiation of the mortgage loans from the original Lender ("A") to a bankrutpcy remote affiliate, the Plan Sponsor "B".  The Plan Sponsor "B" then sells to the Depositor "C", usually a bankruptcy remote affiliate of the investment bank.  Then it is the Depositor which deposits the mortgages collateral into the mortgage trust by exchanging the mortgage collateral for the trust certificates.  The mortgage trust is represented by the trustee ("D").

Now re-read the sentence above within the context of this scheme.  It is the Depositor "C" which is delivering the negotiable instrument to the Trustee "D".  IF the instrument is indorsed in favor of the trustee as described it could ONLY be so indorsed by the Depositor, as ANY restrictive indorsement to the Trustee would absolutely FAIL and be ineffective as a negotiation as between A and B, as well as B and C.

That is, A can negotiate the instrument to B ONLY by either indorsing it in blank OR by indorsing it in favor of B.  Indorsing it to D and delivering it to B is NOT a valid negotiation!  The same is true as to B and C.

If the instrument delivered to D is indorsed in blank, it might be so indorsed (under the UCC) by either A, B OR C.  If there is a blank indorsement by C, then presumably there must have been one or more prior intervening indorsements into C.  (If the note was delivered to C unindorsed, then there would be no reason under the UCC for C to add a blank indorsement.)

The key sentence seems to me to be this one:

"The Mortgage Note shall include all intervening endorsements showing a complete chain of the title from the originator to [____________________] or "Pay to the order of LaSalle Bank National Association, as trustee, without recourse" [emphasis added]".

I think that it is the presence of the word ALL that causes LEVITIN's interpretation to fail, particularly in light of what will be the testimony of the parties as to their intent, as well as the common industry practice.

ALL subsumes the possibility that this includes the NULL set.  That is, if we are playing the card game "Go Fish", and I ask you for ALL of your Jacks, you might give me ZERO, one, two or three cards.  If you give me NO CARDS and have NO Jacks, you have complied with my request and played fairly.

If I give you a note that is indorsed IN BLANK by the originating Lender and contains NO INTERVENING INDORSEMENTS, the instrument will INCLUDE all intervening indorsements.  But there will be NONE as there were NO SUCH indorsements.

By contrast, read the language with the word ALL omitted: 

"The Mortgage Note shall include intervening endorsements showing a complete chain of the title from the originator to [____________________] or "Pay to the order of LaSalle Bank National Association, as trustee, without recourse" [emphasis added]".

This language would appear to me to be directive REQUIRING intervening indorsements showing a complete chain of title.

I believe that the word "all" was purposefully included to reflect that IF there are any intervening indorsements, that ALL of these must be included and that ALL of these indorsements must, together, show a complete chain of title.

I believe that the inclusion of the word "all" is not superfluous.  I think that it changes the meaning of the sentence.

*

On the other hand I think that the best argument in favor of Mr. LEVITIN's reading is the inclusion of the word complete.  Another different word might have been used, such as valid or continuous.

Complete seems to me to impart a little more.  I think that it is very possible that one could get a court to agree with Mr. LEVITIN's interpretation, particularly if the plaintiff fails to get evidence into the record reflecting the intention of the parties.

Very often, the foreclosure mill attorneys give short shrift to the arguments and the evidence and they are particulary careless when litigating with pro se litigants.

*

Even so, I think that the argument that the negotiation is invalid because of a failure to comply with the provisions of the PSA is not going to be particularly persuasive.  Sales are consummated all the time where one or both party deviates from the agreed upon contractual terms.  Parties sometimes waive certain contractual requirements.  But the borrower is a non-party to the negotiation transaction.

So while I would certainly try to make this argument, I would also look for another stronger argument to support my defense.  In short, I wouldn't bet the house on this argument!
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Texas
http://www.reuters.com/article/idUSTRE6BG3UW20101217
SEC sends more subpoenas in mortgage probe

SEC is concerned the notes did not get to the Trust, hmmm


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