At Bank of America, more incomplete mortgage docs raise more questionsJune 3, 2011: 11:49 AM ET
Fortune examined hundreds of foreclosure documents to determine the validity of mortgage securitizations after Bank of America debunked testimony about them last fall. The results raise more questions than they answer.
By Abigail Field, contributor
FORTUNE -- Are Countrywide mortgage-backed securities really mortgage-backed? Do banks even have the legal right to foreclose on certain homes?
These are just a few of the questions raised since the foreclosure crisis revealed shoddy mortgage servicing practices at many of the big banks – practices that have led to countless investigations and lawsuits. Court testimony by a former Countrywide employee added to the intrigue last fall, because she confessed that many loans there weren't properly handled, bringing into doubt the validity of Countrywide's securitization process. Bank of America, which owns Countrywide, quickly silenced the discussion with firm denials.
But Fortune has examined dozens of court records that corroborate the employee's testimony. And if Countrywide's mortgage securitizations systematically failed as it appears they did, Bank of America's potential liability dwarfs its shareholder equity, as the Congressional Oversight Panel points out.
Last November, a decision in a New Jersey bankruptcy case brought to light the testimony of Linda DeMartini, operational team leader for the litigation management department for Bank of America, which intended to prove the bank had the right to foreclose on a debtor's mortgage. Instead, her testimony was key to the judge's ruling that Bank of America (BAC) couldn't foreclose, and along the way DeMartini made two statements that called into question the securitization of Countrywide loans. She testified that Countrywide didn't deliver the notes to the securitization trustee, and that Countrywide notes weren't endorsed except on a case-by-case basis generally long after securitization ostensibly occurred. Both steps are required, in one form or another, under all securitization contracts.
Only the delivery issue was really scrutinized at the time, because without a doubt the failure to deliver the notes would invalidate the securitization. The other issue, failure to endorse the notes, sparked a debate: the American Securitization Forum argues the notes would still have been securitized without endorsement, while Adam Levitin, associate professor of law at Georgetown Law, convincingly argues that they would not have been.
If the securitization failed, a variety of securities fraud charges could follow. Indeed, one investor lawsuit based in part on DeMartini's testimony about endorsements and delivery has already been filed. And investors aren't the only possible pursuers of securities fraud -- New York Attorney General Eric Schneiderman is investigating mortgage securitizations by three banks, including Bank of America.
Bank of America vigorously denied DeMartini's testimony, insisting that as a member of Countrywide's mortgage servicing department, she didn't know what was happening during securitization. Besides, BofA insisted, its policy was and always has been to comply with the securitization contracts.
Although law enforcement should be able to answer the delivery question easily -- DeMartini indicated that Bank of America has FedEx tracking records for each note -- it's impossible for the public to check. But the endorsement of notes is easy to test. In every foreclosure, the bank must give the court the note or an accurate copy of it. And those notes are either properly endorsed or they're not.
To check DeMartini's testimony, Fortune examined the foreclosures filed in two New York counties (Westchester and the Bronx) between 2006 and 2010. There were 130 cases where the Bank of New York (BK) was foreclosing on behalf of a Countrywide mortgage-backed security. In 104 of those cases, the loan was originally made by Countrywide; the other 26 were made by other banks and sold to Countrywide for securitization.
None of the 104 Countrywide loans were endorsed by Countrywide – they included only the original borrower's signature. Two-thirds of the loans made by other banks also lacked bank endorsements. The other third were endorsed either directly on the note or on an allonge, or a rider, accompanying the note.
The lack of Countrywide endorsements, combined with the bank's representation to the court that these documents are accurate copies of the original notes, calls into question the securitization of these loans, as well as Bank of New York's right, as trustee, to foreclose on them. These notes ostensibly belong to over 100 different Countrywide securities and worse, they were originally made as long ago as 2002. If the lack of endorsement on these notes is typical -- and 104 out of 104 suggests it is -- the problem occurs across Countrywide securities and for loans that pre-date the peak-bubble mortgage frenzy.
The lack of Countrywide endorsements also corroborates DeMartini, who said that in her 10 years at Countrywide she had never seen a note with an endorsement, and that as foreclosures had been increasingly litigated, she had been handling the original notes, not just the copies scanned into the bank's database.
Bank of New York maintains that it had the right to foreclose on the notes. "The assignment language included in the pooling and servicing agreements that govern the trusts, along with the actual transfer of the mortgage note to the trustee and/or custodian, provide the trustee with the proper legal standing," Bank of New York spokesman Kevin Heine said in a statement. But even if true, the right to foreclose must be demonstrated in every case, and it doesn't seem to have been in any of these cases from New York.
As for the endorsements, foreclosure defense attorneys say a troubling phenomenon has been happening: "magically" appearing endorsements. That is, the note originally given the court has no endorsement, but after the defense points out the problem, an endorsed note is submitted. Here are several examples from Florida cases, all involving loans serviced by Countrywide, half of which were also made by Countrywide. Here is an example from a California bankruptcy case.
Todd Allen, the Florida attorney who shared the Florida examples, says the problem occurred with all the banks, not just Countrywide: "Magically appearing endorsements happen so often in Florida that I expect the banks' explanation to begin with: 'Once upon a time, in a land far, far away.' Unfortunately, the courts often turn a blind eye to the banks' shell game and homeowners are left with the empty shell."
Bank of America continues to deny that it failed to endorse mortgages as DeMartini claimed, even after seeing the cases Fortune uncovered from New York. It issued this statement in response: "Bank of America's policy is to conduct foreclosures in accordance with all applicable laws. After halting foreclosures last year, we reviewed our process with regulators and continue to do so as we incorporate improvements. Reviews have shown that foreclosed loans were seriously delinquent and that we could support our legal standing to foreclose. We believe the files referenced contain appropriate documentation. We offer home retention options and foreclosure avoidance programs to our distressed customers. Foreclosure is our last resort."
It will be left to the investigators – and possibly ultimately the courts – to decide whether the applicable laws were indeed followed. Meanwhile, Countrywide managers have given interviews to Moody's Investor Service, which led Moody's to reassure investors that notes were systematically endorsed, either in blank on the note or via allonge.
But if that's accurate, why don't the sampled court records reflect it?