The financial blogosphere is beginning to buzz over new revelations about Countrywide Financials mortgage securitization practices. The new information came to light through the testimony of an employee of Bank of America , which now owns Countrywide Financials.
As I wrote in an article yesterday, the gist of the story is this: A Bank of America executive named Linda DeMartini testified in a New Jersey bankruptcy case that a promissory note, which later became relevant in a foreclosure proceeding, had not been properly transferred from countrywide to the mortgage's new owner. Countrywide had sold the mortgage to another financial institution, where it ultimately remained as part of a mortgage backed security. The pooling and servicing agreement, which governs the terms of the securitization, requires that the promissory note is physically transferred to the securitization trust.
But the biggest news in the article I wrote yesterday would seem to be a direct quotation from the judge's opinion in the bankruptcy case: "She [DeMartini] testified further that it was customary for Countrywide to maintain possession of the original note and related loan documents."
That assertion certainly seems to suggest that the failure to transfer a promissory note from Countrywide Financial to the security trust in this case was not an isolated error—but a matter of policy at Countrywide Financial.
As I wrote yesterday, in reference to a piece Gretchen Morgenson had written for The New York Times: "Morgenson continues, in rather measured tones, considering the apparent ramifications of the statement: 'If Countrywide’s practice was to hold onto the note, then investors in this pool and others may question whether the security was constructed properly and legally and may be able to require Bank of America to buy back their securities.'"
I ended the piece—somewhat presciently, perhaps—on this note: "
It may be a fair bet to expect this story to appear throughout the news cycle with increased frequency—and magnitude—as the week continues and the implications sink in."
Today, Naked Capitalism ran a very interesting piece on the same subject.
The Naked Capitalism article quoted in full a short Bloomberg News story, which I also quote below in full:
"A Bank of America Corp. employee who said that Countrywide Financial Corp.’s policies were to retain mortgage notes later clarified her testimony in a New Jersey bankruptcy case, a lawyer for the company said.
“Countrywide’s policy and practice has been and remains to fully comply with the pooling and servicing agreements, including forwarding any necessary documents to the trustee,” Larry Platt, a lawyer at Kirkpatrick & Lockhart, said in an e- mailed statement. "Bank of America, based in Charlotte, North Carolina, acquired Countrywide in 2008."
“The associate whose testimony was cited in the ruling was asked about a process outside her normal scope of responsibilities and in an entirely different department from where she worked,” Platt said.
“'A review of her testimony shows she later clarified that she was not comfortable testifying about the circumstances under which original loan documents would move, or whether and to what extent they ever are moved. This would include the initial delivery of original loan documents to the trustee,' he said."
As naked capitalism observes: "This comes pretty close to depicting the employee’s statement that Countrywide never delivered the loans as a misstatement."
I would point out that DeMartini's professional title is listed in the court papers as "a supervisor and operational team leader for the Litigation Management Department for BAC Home Loans Servicing L.P."
Of course, we can't know for certain—but it does seem fair to observe that a reasonable person might suspect that an employee in such a role would have some relevant knowledge about the process under discussion.
Naked Capitalism also includes a fascinating excerpt from the original oral arguments in the case. In the two paragraphs that follow, the judge is speaking:
"I am, frankly, appalled at the confusion and lack of credibility of Countrywide’s response to the issue of the note—the possession of the note.
"We started out with Ms. DeMartini’s testimony that the note never leaves the servicer. She says that she saw a Federal Express receipt whereby the actual note, the physical, original note was transferred to the Foreclosure Department internally in the same building, but that the note had not yet been located. That’s where we stood at that point. Then we had a submission, the supplemental submission saying the original note has been found and can be available for inspection.
It doesn’t say where it was found, who had possession or the like, but it was found and is available for inspection. And then without any explanation, there is a lost note affidavit presented dated February of 2007 indicating that the note cannot be found. No explanation provided. What do I do with that, Mr. Kaplan?"
The Mr. Kaplan referred to above is Countrywide's counsel in the hearing.
It seems fair to observe that the confusion over the location of the note at Countrywide appears deep and profound—a point not lost on the judge, based on his comments at the end of the paragraph cited above.
Finally, in what might be the most revealing excerpt from court documents contained in the Naked Capitalism piece, we have the following exchange, between the judge and Mr. Kaplan, Countrywide's attorney.
"THE COURT: And you do understand as well that the Pooling and Servicing Agreement requires that transfer, that physical transfer of the note in accordance with—and endorsement—in accordance with UCC requirements?"
"MR. KAPLAN: I understand that, Your Honor…And I can say that, although Your Honor is right and the UCC and the Master Servicing Agreement apparently requires that, procedure seems to indicate that they don’t physically move documents from place to place because of the fear of loss and the trouble involved and the people handling them. They basically execute the necessary documents and retain them as long as servicing’s retained. The documents only leave when servicing is released."
Mr. Kaplan seems clear on the point of the loan documents not changing hands, due to "trouble involved and the people handling them." (Given only the context above, it is less clear what he means by the statement "The documents only leave when servicing is released.")
As Naked Capitalism rhetorically asks: "I’d like to know how Bank of America’s law firm explains this. It isn’t merely Ms. DeMartini who is presenting the failure to transfer notes as standard practice. So does Kaplan, and he offers a plausible rationale."
It has begun to seem like the most charitable interpretation for Bank of America is that the securitization process at countrywide was so hopelessly muddled and confused that it is difficult to say precisely what happened and when.
And perhaps we can all be forgiven for wondering about what larger ramifications this case may have for Bank of America—as well as for the possibility of a broader mortgage repurchase crisis.
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