By now I imagine that everyone recognizes a pandemic of legally flawed foreclosures has infected America’s land records. But not everyone realizes how deep the greed and “corner cutting” goes. For example, a significant percentage of the flawed proceedings tainting our hundreds-year-healthy system of tracking land ownership may reflect nothing more than mortgage servicers’ unwillingness to get the original promissory note, mortgage and assignments from the vault. That is, using the real, accurate documents (and complying with the rules and law) is too expensive.
(Sorry officer, I recognize I was going 80 in a 35 mile an hour zone. It was costing me too much money to drive the speed limit. Time is money.)
Using the real documents is a hassle because the vault often isn’t at the mortgage servicer’s, but at a “document custodian” such as Deutsche Bank. So instead of getting the originals, the evidence I discuss below indicates that mortgage servicers print out the scanned images of notes that are already in their databases, the images the servicers received to start servicing the loans. These scans were typically made before the notes were endorsed, which means that the servicer is giving the court a printout that is not the “true and certified” copy of the note that the mortgage servicer is claiming it is and the rules require it to be.
It also means, in the case of securitized loans, that nothing will appear on the note to tie the note to the securitized trust or trustee in whose name the servicer is trying to foreclose. That is, these printouts won’t prove standing, even though the document in the vault, if properly securitized, would be endorsed in a way that did.
So by using these convenient and cheap printouts, servicers cut costs while creating two kinds of problematic foreclosures for the rest of us.
If foreclosures based on unendorsed scans aren’t challenged and the foreclosure happens even though the foreclosure record doesn’t establish the bank had the right to foreclose, the property’s title is clouded. And if foreclosures based on the scans are challenged, the foreclosure process is longer and more expensive for everybody. Either problem, whenever a properly endorsed original sits in the vault, is avoidable but deliberately not avoided. Thanks, servicers.
(Again, in many foreclosures, documents or critical endorsements are just missing. No endorsements mean those loans were almost certainly not successfully securitized. Indeed the New York Attorney General is warning about securitization failures and related document fabrication. This problem is massive, because a busted securitization problem can’t be fixed. Securitization trusts are just too rigid. But I’m talking about in the significant number of cases where the documents and securitization were handled correctly.)
According to someone who will only let me describe him as “an industry source familiar with document management practices at that time,” by mid-2004 it was industry practice to image notes and mortgages immediately after origination, send the images to the servicers, and then send the originals directly to a document custodian such as Deutsche Bank. The source also explained that after the scans were done but before the original documents were brought to the custodian, they would often be endorsed. At least, the loans made by lenders who didn’t have their own money but instead were funded by “warehouse lenders” would have endorsed notes. That’s because the warehouse lenders wouldn’t fund the loans unless the document custodians certified that the original note was properly endorsed, and it and the other originals were properly delivered. According to the source the scans were done deliberately before the endorsements were added because the endorsements were typically “in blank” which made the note into bearer paper akin to a check made out to cash. If a person could print out scans of notes endorsed in blank it would be easy to try to wrongfully collect on the loan.
While my unnamed industry source offered the most detail, he isn’t the only person saying servicers have and use such scans. Linda DeMartini, a witness for Bank of America in a bankruptcy case, told the court that Countrywide imaged documents right after they were originated, to use for servicing (page 46 starting at line 7). And in another case, Deutsche Bank’s Chris Corcoran told the court that as document custodian it had received the originals directly from the originator, before the loans had been securitized, according to a certified audio recording of the proceeding I’ve reviewed. Finally, in a case where Bank of America was challenged for submitting a note without an endorsement and a later version with one, the attorney explained that the first note was an “imaged copy maintained in BAC’s computerized system in the form in which it existed prior to endorsement.” The second, endorsed one was a true copy of the original, she asserted.
This scanning idea makes sense when you consider the practicalities. Many mortgages were made to sell up the origination chain to the securitizers. Selling a loan several times is a logistically easier if the only thing changing hands is a spreadsheet while the note, mortgage and any assignments stay put with the document custodian. Moreover, loans need to be serviced within thirty days; somebody’s got to receive that mortgage payment. Scanning the note and sending an image on to the servicer would allow servicing to start on time regardless of how long securitization took. Since the scan was purely for servicing purposes, and the dangers of scanning an endorsed-in-blank version, who cared if it was a true and certified copy of the original?
Just Hitting “Print”
And just as if they were simply hitting “print”, across the country, mortgage servicers have submitted notes that aren’t endorsed at all, even though the notes were securitized and thus supposed to be endorsed at least once. For example, all of these notes were claimed by trusts and lacked any endorsement (labeled by loan originator): BNC, Lenox Financial one, Aegis Lending, People’s Choice, and Lending 1st. The trustees for those loans were BofA, CitiMortgage, US Bank and Wells Fargo. Here’s a Fannie Mae note filed without endorsement, one of four I found in the Florida courts easily.
Are these all obsolete images? Well, the Fannie Mae ones seem to be. After being shown the unendorsed notes submitted in its name, Fannie Mae had this to say:
“Fannie Mae acquired the four notes during the years 2005, 2006, and 2007. The original of each note is properly endorsed to Fannie Mae….Fannie Mae relies upon servicers to prepare accurate and appropriate assignments of mortgage.”
Or consider what happened in In Re Kohler, a Wisconsin bankruptcy case. In Kohler the bank’s lawyers filed notes endorsed by allonges that didn’t make sense because they were dated in 2009 but the notes were securitized in 2006. When Rollie Hanson, the homeowners’ attorney, challenged the allonges, the bank’s attorneys filed new versions from the document custodian. Hanson says the bank’s attorneys admitted that they simply created the first set of allonges to meet their burden of proof for the filing. The servicer had apparently given them a note to file that wasn’t properly endorsed. Was that note an image? If not, why weren’t the allonges the document custodian eventually produced and testified to attached to it in the first place?
Sometimes it’s not clear what shifting endorsements result from. Perhaps a newly filed endorsed note version represents the eventual production of a properly endorsed original. Or perhaps the bank is just adding an endorsement to a printout, or even to the original note. Certainly servicers are fabricating documents in other contexts.
For whatever reason, endorsements are appearing after notes without them have been filed. California attorney Joseph Arthur Roberts gave me examples from Wells Fargo (original filing, note without endorsement—note the “true and certified copy” stamp; later filing, note with endorsement), and OneWest (original filing without endorsement; later filing with endorsement). I found a couple of others; with this filing, an unendorsed note was submitted in Citi’s name as trustee; a couple of days later, this filing followed, and the note was endorsed. Finally here’s a filing in Deutsche Bank’s name without endorsement, and here’s a later filing with an endorsed note.
When courts decide to focus on these discrepancies, they’re not happy. In one California bankruptcy case, Judge Laura S. Taylor took OneWest to task for submitting both an unendorsed note and an endorsed note, among other evidentiary issues. Taylor wrote that “the Court is concerned that OneWest has determined that business expediency and cost containment are more important that complete candor with the court” and pointed out that OneWest has been caught doing similar things in other California cases.
In sum, some of the unendorsed notes are being given courts because securitizations weren’t done properly and the original doesn’t exist or isn’t endorsed. But other times, the servicer is just being cheap and dishonest, giving the court a “true and certified copy” of the original that isn’t, with all the unnecessary problems that follow. Just another example of cost shifting from big bank mortgage servicers to the rest of us.