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In relation to the chain of title argument on securitization, I have been repeatedly confronted (often unsolicited) with an argument that there's no way there were massive screw-ups because thousands of top Wall Street legal minds were working on securitization deals. Yes, and there's no way the underwriting was lousy on the mortgages themselves because thousands were being done. I tend to get this argument from people with a large financial stake in ensuring that securitizations don't fail. This is a really bad argument, so let me just debunk it now (and hopefully never hear it again):
This isn't to say that things are necessarily screwed up, but surely the presence of lots of smart people in designing securitization deals does not support an argument that the deals were properly executed.
The Smartest Guys in the Room were Enron.
Just curious, but how many securitization deals have you worked on? You were a bankruptcy attorney, right?
Just want to know where all this presumed knowledge about how things "worked" in securitization deals comes from. Since I've seen you make some pretty jaw-dropping mistakes on *bankruptcy* law on this blog, I'm pretty skeptical that you really know what you're talking about.
Enron, LTCM; the both ended the same way; hopefully the principles in this ghastly mess will also end up either in prison or dead.
I doubt that lawyers of any level reviewed any of the individual residential loan docs for securitization of those loans.
In the commercial real estate securitization world where I worked lawyers looked over the docs for each loan.
But I would bet that in the residential loan securitization world the lawyers created standard documents and clerical level people working for the originators filled them in and handled the alleged "assignments" without lawyers reviewing any of them.
Just my two cents. The originators would not have wanted to pay the lawyers to look at even a sampling. The reason this seems likely to me is that hte originators were willing to ignore state laws on recording assignments of mortgages to save $50 to $500 per loan. I'm betting they didn't pay lawyers to look at any of the docs for any of the individual loans.
Many years ago I was retained to give a local counsel opinion on a major secured financing ($x00 million). Enforceability, perfection, and priority. I'm in a smallish state, but the borrowers' principle place of business was in our state. As those things went, I was working almost exclusively with associates in the lender's "white shoe" New York law firm. It was Friday. They wanted to close on Monday. They couldn't close without my opinion. I wouldn't give an opinion until I had read all of the documents. This was before email, so there was lots of faxing going on.
Around 4:30 on Friday, I was reviewing one of around 30 guaranty agreements. When I got to the "action words" (i.e., the words of guaranty) it became very clear that something was very wrong. There was no verb in the alleged sentence. The guaranty wasn't a guaranty. I checked several of the other guaranties, and they all had the same problem. I quickly got on the phone with the senior person with whom I had dealt. I had to insist that they pull him out of a meeting. He didn't believe me at first. He said something like "It can't be wrong. It's the form we use for all of [one of the world's biggest bank]'s deals." Then he read it. He got really quiet and said he would call me back.
I never heard from that fellow. A very senior partner called me a couple of hours later to thank me. Apparently nobody else had caught the error. He suggested that I add some serious money to my bill. Of course, I couldn't really do that, because my client was the borrower, not the lender.
I've always wondered how many deals needed to be reworked because of the bad form. And how many people suffered adverse employment consequences.
The moral: Big firms can really screw up. Even on big deals.
Hank--are you disputing anything in my post or just engaging in ad hominem attack?
Let's consider your ad hominem line. If you think I've made "jaw-dropping mistakes on *bankruptcy* law on this blog," I'd sure like to know what what they were. I'm not aware of anything that rises to that level. There have been commentators who have argued against my assertions on credit card interchange, in particular, but I don't recall anyone telling me I don't know what I'm talking about in the bankruptcy area. If you've got any evidence to back up your claim, please lay it out. Otherwise, I can only conclude that your skepticism is due to your ideological priors.
I'm not sure what assertions in this post you are actually questioning. There are very few factual assertions in this post. As far as I can tell they are mainly in the 3rd bullet point. I know the number of loans in a typical RMBS deal from databases; I know what partners and associates bill from having prepared billing statements in bankruptcy cases; and I know the incentives of law firm associates because I was one, I am friends with many of them, and was married to one.
There's nothing particularly unique about the economics or dynamics of diligence on a securitization deal. I worked on some securitization true sale opinion letters and have done diligence on corporate deals, but I haven't had the pleasure of sorting through thousands of endorsements in an RMBS diligence. (If so, I'd be one of the ones responsible for the screw ups...) I have, however, spoken to people who have spent more hours than they ever wanted doing structured finance diligence, and I have no reason to doubt what they tell me. Again, if you dispute anything asserted in the post, please state so.
RegReader: I think you're probably right. It'd sure be interesting to know how many hours were billed for diligence on RMBS deals. I'm sure the number was far too low for there to have been anything but a sampling. I am told that in the good old days attorneys were much more careful, but that was when these were more bespoke, high profile deals, instead of the factory production of the bubble.
Commercial mortgage securitization is quite different (and I've written about that). There are many fewer properties (about 150 on average) in a deal and a screw up on a single on is very costly. Goof on a commercial property, and that's several million. Goof on a resi mortgage and that's maybe $150K. There is better diligence on commercial deals, not least because the junior tranche holder gets to do a special round of diligence.
Phil: you're right of course. Enron had the smartest guys in the room, and the LTCM guys just had some Nobel laureates working for them (perhaps not in the room). Both are great examples of intelligence not being a guarantee of success.
Adam,
I posted this at Mike Konczal's Rortybomb a few hours ago, but I think it's also worth adding it here - it's taken from the late Tanta at Calculated Risk in 2007:
http://www.calculatedriskblog.com/2007/11/deutsche-bank-fc-problems-and-revenge.html
On the one hand, mistakes just do get made, in any business. On the other hand, the mortgage industry's back room got incredibly sloppy during the boom. You had experienced closing and post-closing staff laid off and replaced by temps who don't know an endorsement from a box of Wheaties, you had loans being sold by brand-new entrants into the business with no experience in these legal transactions, you had gigantic pressures to move loans through the pipeline into a security as fast as possible and paperwork be damned, you had a business too comfortable working on reps and warranties and indemnifications"“on a promise to make it good if it ever blows up rather than fixing it now. You had regulators of big depositories that were sound asleep when it came to such operational "trivia."
There's a lot more in Tanta's archive, from someone who could see all the screwed up interior workings of the beast, but wouldn't live to see it all unravel.
Adam:
I'm curious. Do you think that the opinion means that the debt represented by the note no longer exists, and that the mortgage is therefore unenforceable? Or is it an issue of getting the note and mortgage legally into the same set of hands?
I agree with you that the implications of this for B of A (by way of Countrywide) and others who originated and "sort of" sold these loans are ominous, because the syndication trusts have, as you say, the ultimate "put." But the bottom line remains that the debtors received the loan proceeds and mortgaged their real estate to secure their obligations. Even if their personal obligations on the loans are discharged, I would think that somebody will ultimately be able to foreclose on the property.
tww--the note still exists and is valid and the mortgage should be enforceable, absent other defects. The only issue is who can enforce it. The holder of the note can definitely enforce the note, and the mortgagee can foreclose if there is a default on the note. There's an interesting question about whether someone with the mortgage, but not the note can foreclose. That's sort of the issue presented by foreclosures in MERS name, as MERS doesn't have the note (excluding e-notes), but there at least MERS can claim that it is acting as a nominee for the noteholder. If you take away the nominee angle, I think it's a trickier question.
For the homeowner, then, the bottom line is that there's a temporary stay of execution and maybe a greater possibility of a workout. But from RMBS investors' standpoint, a securitization fail has critical consequences because the loss on the mortgage is actually the bank's, not theirs.
Thanks, Adam:
I agree with you (I'm sure that helps your self-esteem). When I started reading the opinion, I thought we were headed down the MERS highway. I was pleasantly surprised where we ended up.
I had a case back in the '80s representing the FDIC where the note had been properly negotiated through the "chain of title," but the mortgage had not been assigned, either of record or otherwise. A bankruptcy trustee objected to our claim. We prevailed based on the doctrine that the lien follows the obligation. The lien was of record, so no subsequent "purchaser" could trump it. This negated the trustee's rights under sec. 544. No reported decision, unfortunately.
Keep up the good work. While I often don't agree with you, I always enjoy reading your posts.
tww--are you worried about my self-esteem?
I've previously heard that FDIC and RTC had a number of cases with documentation problems. If anyone knows more about those issues, I'm all ears.
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