Chain of Title (6 page)

As the twenty-day deadline for responding to the summons loomed, Lisa wanted to find out.

3

SECURITIZATION FAIL; OR, CIRILO CODRINGTON AND THE PANAMA DOC SHOP

None of Lisa Epstein's options for dealing with her foreclosure seemed very attractive. She could try the
Home Affordable Modification Program, or HAMP, which President Obama announced from Mesa, Arizona, on February 18, 2009, the day after Lisa was served. She pulled the speech up at the White House website. The idea was that the Treasury Department would give mortgage servicers incentive payments to modify delinquent loans. In the speech, Obama kept stressing borrower responsibilities more than the responsibilities of fraudulent lenders or securitizing banks. Did he not understand how this crisis happened? Plus HAMP involved applying through Chase Home Finance, Lisa's servicer, which spent nine months losing her paperwork, ignoring her requests for help, and driving her into foreclosure by advising her to miss payments. Common sense dictated they wouldn't be much better at administering a new program, no matter how many inducements the government gave them.

Lisa could fight it out in court, but the handful of lawyers taking foreclosure cases in Palm Beach County wanted retainers of up to $5,000, and $340 an hour in consultation fees. If Lisa had that kind of money, she probably wouldn't be in foreclosure to begin with. Legal aid societies and pro bono lawyers working for free were overloaded and unavailable for someone with a decent job, like Lisa. Banks knew troubled homeowners didn't have the resources to fight foreclosures; that's why everyone told her most cases never got challenged. Besides, anytime Lisa would meet with a lawyer—and she talked to several, even drove an hour down to Broward County once—she'd explain her operatic theories about the housing crash,
and the attorneys would stare at her like she sprouted horns. They all told her there wasn't much she could do if she didn't pay. But Lisa pleaded, “You don't understand. The bank suing me says they have no relationship with me. How could I just give up?”

Without hope of a last-minute intervention, and without funds for legal representation, Lisa had a third option: fight the foreclosure herself, as a
pro se
litigant. This sounded crazy to her. She had no legal training, picking up bits and pieces in late-night cram sessions. The saying went that anyone who represents herself as a lawyer has a fool for a client. But Lisa's motivations went far beyond whether or not she would keep that misbegotten house on Gazetta Way.

Something had gone horribly awry at the highest levels of the economy, causing the largest destruction of wealth in eighty years. Wall Street recklessness played the signature role, and Lisa wanted to challenge that in her small way. Maybe she could unearth some novel strategy, share her knowledge, and help spare other unsuspecting Americans from her pain. It would be difficult, no doubt, maybe impossible, maybe preposterous to even try. But Lisa didn't think it worth her personal comfort to stay silent. Something about the magnitude of the crisis and the constancy of voices tagging foreclosure victims like her as irresolute deadbeats made her more determined to prove everyone wrong, to keep searching until she found something she could call justice.

While running through all this, Lisa kept coming back to Count II, the “Re-establishment of Lost Note.”

A mortgage has two parts. There's the promissory note, the IOU from borrower to lender, and the mortgage, which creates the lien on the home in case of default. Foreclosure laws vary from state to state and evolve with every court decision, but in the simplest terms, to be able to foreclose, a financial institution must hold the mortgage, the note, or both. This gives you standing, as it would in most judicial contexts: if you accuse someone of stealing your car, you'd need to establish that you actually owned it in the first place.

During securitization, mortgages were transferred from the originator through a series of intermediaries and then to the trustee, who administers
the mortgage-backed trust. Lisa's case featured three parties in all—DHI Mortgage (originator), JPMorgan Chase (depositor), and U.S. Bank (trustee)—but sometimes these deals had as many as seven or eight transfers. The securitizations included intermediaries mostly to reassure investors that they would still get payments if the originator went out of business, which actually happened quite a bit.
This desire for “bankruptcy remoteness” drove securitization transfers, and it didn't hurt that every transfer generated another fee.

At each stage there would have to be documented evidence of transfer, like links in a chain—a chain of title, which lays out the different transactions. You can't skip a link: the chain must show evidence of transfers from originator to depositor to trustee, and everyone in between, in precise order. Mortgages are assigned with a signed piece of paper affirming the transaction. Notes are endorsed the same way you would endorse the back of a check. Theoretically, the originator could endorse the note “in blank,” so that anyone in possession of the note could enforce it. But that theory ran up against the reality of the securitization agreements.

When Lisa finally found copies of the rules governing securitizations, known as the pooling and servicing agreements (PSAs), they all had roughly the same language about transfers. This comes from the prospectus of Soundview Home Loan Trust 2006-OPT2:

On the Closing Date, the Depositor will transfer to the Trust all of its right, title and interest in and to each Mortgage Loan, the related mortgage note, Mortgage, assignment of mortgage in recordable form in blank or to the Trustee and other related documents received from the Originator pursuant to the Master Agreement (collectively, the “Related Documents”). . . .

The Pooling Agreement will require that, within the time period specified therein, the Depositor will deliver or cause to be delivered to the Trustee (or a custodian on behalf of the Trustee) the mortgage notes endorsed to the Trustee on behalf of the Certificateholders and the Related Documents.

The mortgage and the note had to be physically conveyed into the trust and delivered to the document custodian, with the mortgages assigned and the notes endorsed with a wet-ink signature at every step along the way, culminating in assignments and endorsements to the trustee. And this had
to be done within ninety days of the transaction, with no grace period beyond that closing date. Only then would you have a “true sale” of the loans from originator to trustee.

Courtesy of Mike Konczal.

Most trusts were created under New York State trust law, which is unbelievably clear. It stipulates that the pooling and servicing agreements are the governing documents. Any transaction that doesn't comply with the PSA is void. Failure to convey mortgages and notes would result in noncompliance. That means the trust would be unfunded and effectively
not exist
. Ownership would revert back to the last verifiable owner in the chain.
And under New York law, there was no mechanism to transfer mortgages and notes after the closing date.

There are tax consequences associated with this failure as well. All securitization trusts were set up as REMICs. If the trust closed without the key documents conveyed over, those assets would not qualify for the REMIC tax exemption. They could not be added later, especially in the middle of
foreclosure, because REMICs cannot acquire nonperforming assets. As a result, any income derived from the assets would get taxed, under the law, at
100 percent
.

Those were the rules, spelled out in governing documents agreed to by all parties. And the
Living Lies
chatterers were convinced that nobody in the mortgage industry bothered to follow them. If this theory was correct, it would turn mortgage-backed securities into non-mortgage-backed securities. And the trustee, in Lisa's case U.S. Bank, would not have the right to collect on the promissory note or use the mortgage lien to foreclose on the borrower. As Neil Garfield put it,
“There is an 18-minute Nixonian gap in the record that cannot be cured.” Activists took to calling it “securitization FAIL.”

The prevalence of “lost” notes, including Lisa's, created more suspicion. If the notes were safely stowed away by the trustee's document custodian, losing them could never be an issue. One study hinted that the losses could be systemic. Neil Garfield originally got interested in securitization FAIL after reading
a November 2007 report by law professor Katherine Porter, then of the University of Iowa. Porter examined public court records in 1,733 bankruptcy cases filed in 2006. She found near-universal disagreement between borrowers and mortgage servicers over amounts owed, with multiple instances of illegally imposed fees, including charging homeowners for ordinary office activities like delivering faxes or creating payoff statements. But one passage leaped out at Garfield: in a majority of cases, servicers lacked one or more pieces of documentation needed to establish the validity of the debt. That included the note, which was missing over 40 percent of the time.

Bankruptcy cases and foreclosure cases are different. But in two out of every five in the study, mortgage companies simply didn't comply with the rules to verify standing. The fact that, according to Porter's paper, bankruptcy courts would routinely let cases advance even without critical documents didn't bode well for those who wanted to fight the system. But thinking about all these different links in the chain and how fast financial institutions were swapping mortgages during the bubble, Lisa was convinced that the companies involved didn't comply with the law. And she couldn't stay quiet about that.

Under Florida law, plaintiffs didn't necessarily have to present the original promissory note at trial. But they did need to give an explanation and show proof of underlying ownership.
This was the “Re-establishment of Lost Note” count in Lisa's complaint: U.S. Bank was announcing its intention to submit evidence that, despite losing the note, it indeed had the right to foreclose.

So on March 9, 2009, just a few weeks after being served with foreclosure papers, Lisa, acting in her own defense as a
pro se
litigant,
filed a motion to dismiss for lack of standing. She cribbed from a couple of sample legal templates at
Living Lies
, arguing that U.S. Bank had no interest in her loan and therefore could not foreclose. The motion was meant to provoke a reaction, to get whatever the bank saw as their proof submitted into the court records. U.S. Bank filed a motion for extension. They weren't prepared to actually make a case.

Shortly after filing her motion, Lisa entered what she would later call her “sleepless phase”: staying up until three in the morning, taking a catnap, and waking up at six. She spent every night reading and researching and learning. She analyzed lists of securitizations, read foreclosure defense strategies, and devoured every article on
Living Lies
. Every morning she would run to the computer to see if she missed anything. It was like going to college for an intense, self-administered degree in high finance. It lasted over three years.

This further strained her relationship with Alan, which had already taken more shots than most marriages could endure. Lisa was spending her nights outside the marriage bed, sitting in that big useless room glued to the home computer, while Alan tossed and turned. The couple barely spoke.

Lisa doesn't quite remember when she moved out of the house. One day, at a light on the outskirts of downtown West Palm Beach, instead of taking a left, she took a right, to the co-op by the Intracoastal. With so much disorder in her life, she longed for the simple pleasures of sitting on the balcony, hearing the water hit the seawall. She'd spend a day at the house and a day at the apartment, consumed by the fantasy that if she just spent more and more time at the condo, maybe Alan wouldn't notice she left. The marriage could dissolve of its own accord, without conflict or even discussion. Lisa gradually gathered her possessions, a couple of things a day, until she
had everything out of the house. She didn't care if Alan stayed there, provided they still owned it. She chuckled at the irony of spending most of her waking hours trying to prevent foreclosure on a house she no longer even lived in.

At the end of April, Jenna had surgery at Miami Children's Hospital, to release the tethered spine and relieve pressure on the vertebrae. Alan came to Miami, staying in a local Ronald McDonald House. Lisa bunked in the hospital room, never leaving Jenna's side. The surgery went well, though afterward Jenna couldn't move for a couple of weeks, confined to lying still on her back. Lisa would lie beside her, breastfeeding or staring at the ceiling, which the hospital used for immobile patients as a projection screen. Lisa would point out the objects or colors that flashed against the ceiling, and Jenna loved it. Dogs and clowns and play pals would come by every day, activities known inside the hospital as “child life.” Sometimes nurses would put Jenna in a wagon and ride her around the corridors.

Loaded up with drugs to relieve the pain, Jenna would also sleep for hours and hours, and Lisa could only wait out the slumber. But Children's Hospital did have an Internet connection. Lisa brought an old Acer laptop, sat by her daughter's bedside, and day and night continued her research. There were moments when Lisa was the only person awake in all of Children's Hospital, the blue light of the computer screen illuminating her face, eyes darting from article to article.