Federal Judge Jed Rakoff Slaps the SEC

Judge Jed Rakoff is furious. He should be. We all should be. On Monday, the Federal District Court judge rightly rejected a plan by the Securities and Exchange Commission to settle a securities fraud case against Citigroup, saying that the $285 million deal was “neither fair, nor reasonable, nor adequate, nor in the public interest.”


Matt Taibbi on the story

Abigail Field on the story here



Links for Your Thanksgiving Coma

The 99 Percent Pass Obama a Note, Gawker

Principal Pay Down in Chapter 13 as a Means of Foreclosure Prevention, Credit Slips

Soured on Saurman, by Adam Levitin, how the Michigan Supreme Court got it wrong.

The Heirs of Karl Lleywellyn:  the PEB Report, Green Cheese, and the Hijacking of American Law (Part III)

The report is also very selective in what it discusses and doesn’t. It discusses the parts of the UCC and official commentary (which is not law, but should at least bind the PEB) that it likes in order to get the “and therefore the banks should win” outcome. For example, the report makes a big deal out of the ability of a transferee who is not a holder (because there is no endorsement) to enforce a note. The point of the report is that lack of endorsements aren’t fatal. Maybe not under Article 3 of the UCC, but they are if a pooling and servicing agreement (PSA) supplements or supplants the UCC, as it is permitted to do per UCC 1-102(3) (current version)/ UCC 1-302 (revised version). No mention of this little problem, however. By framing the issue in UCC-only terms the PEB is able to engineer the desired outcome. But that’s highly misleading as the real world outcomes depend on other areas of law as well as the banks’ ability to meet the requisite evidentiary showings.

(2) Evidentiary Issues.  The report doesn’t address what’s really the nub of the matter when enforcing mortgage notes (negotiable or otherwise)—the evidentiary problems. The issues in courts aren’t so much confusion about what the law is, but that the banks are dancing around the law because they don’t have the evidentiary basis to prevail on any of the grounds that the PEB sets forth. All the law in the world won’t help if you don’t have the facts on your side.

If the foreclosing banks were “holders” in the UCC Article 3 sense (which would require the notes to be negotiable, btw), there’d be no issue here. The problem is that the foreclosing banks are generally are not holders or at least not able to show that they are. Instead, they have to rely on other statuses to enforce the notes—lost note status (the dog ate my note!) or nonholder with rights of a holder. I’ll spare you my comments on the lost note issue. But there’s an important point to make about the nonholder with the rights of a holder. The PEB report conveniently fails to mention a line in the official comment 2 to UCC 3-203 about the ability of a transferee who is not a "holder" to enforce a negotiable note:

Because the transferee’s rights are derivative of the transferor’s rights, those rights must be proved. Because the transferee is not a holder there is no presumption under Section 3-308 that the transferee, by producing the instrument is entitled to payment. (emphasis mine.)

So what does this mean as an evidentiary matter? The transferee needs to prove (1) that the transferor was a holder at the time of the transfer and (2) that the transferor delivered the note to the transferee and (3) that the transfer was for the purpose of giving the transferee the right to enforce the instrument. I have never seen a case in which a foreclosing party claims to be a nonholder in possession of the note and even attempts to prove (1) or (3). Proving (2) without proving both (1) and (3) doesn’t do anything. In other words, 3-203 is requiring that the chain of title, including the timing of the transfer. Good luck showing that. No discussion of this in the PEB report—wouldn’t want to signal to courts that the UCC actually sets up some real evidentiary roadblocks to note enforcement if taken seriously.

OCC Releases Report on Foreclosure Practices

OCC Releases Status Report on Fixing Deficient Foreclosure Practices

WASHINGTON — The Office of the Comptroller of the Currency (OCC) issued a report today on the actions by 12 national bank and federal savings association mortgage servicers to comply with consent orders issued in April 2011 to correct deficient and unsafe or unsound foreclosure practices.

The report, “Interim Status Report: Foreclosure-Related Consent Orders,” summarizes progress on activities related to the independent foreclosure review announced November 1, 2011, as well as other activities to enhance mortgage servicing operations, strengthen oversight of third-party service providers and activities related to Mortgage Electronic Registration Systems (MERS), improve management information systems, assess and manage risk, and ensure compliance with applicable laws and regulations.

While much of the work to correct identified weaknesses in policies, operating procedures, control functions, and audit processes will be substantially complete in the first part of 2012, other longer term initiatives will continue through the balance of 2012.

In addition to the interim report, the OCC also released engagement letters that describe how the independent consultants, retained by the servicers, will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of deficiencies identified in the OCC’s consent orders.  The letters identify the names of the independent consultants conducting the reviews and include language stipulating that consultants would take direction from the OCC throughout the reviews.  This language specifically prohibits servicers from overseeing, directing, or supervising any of the reviews.  Limited proprietary and personal information has been redacted.  The review process being implemented at some companies may differ from that described in the engagement letters because of subsequent coordination with the OCC to ensure a consistent process among the servicers

OCC Interim Report

Lender Processing Services Employees Indicted for Fraudulent Documents and Robo-Signing in Nevada

Nevada Attorney General Catherine Cortez Mast0 has filed a 606 count criminal indictment against two title officers, for supervising the filing of tens of thousands of fraudulent documents during their tenure at LPS, or Lender Processing Services.

Wall Street Journal: “Nevada Grand Jury Indicts Two in Alleged Robo-Signing Scheme”

The grand jury found “probable cause” that the alleged scheme “resulted in the filing of tens of thousands of fraudulent documents … between 2005 and 2008,” said Nevada Chief Deputy Attorney General John Kelleher.


The AG’s Press Release on the Indictments

The indictment alleges that both defendants directed the fraudulent notarization and

filing of documents which were used to initiate foreclosure on local homeowners.

The State alleges that these documents, referred to as Notices of Default, or “NODs”,

were prepared locally. The State alleges that the defendants directed employees under

their supervision, to forge their names on foreclosure documents, then notarize the

signatures they just forged, thereby fraudulently attesting that the defendants actually

signed the documents, which was untrue and in violation of State law. The defendants

then allegedly directed the employees under their supervision to file the fraudulent

documents with the Clark County Recorder’s office, to be used to start foreclosures on

homes throughout the County.

The indictment alleges that these crimes were done in secret in order to avoid detection.

The fraudulent NODs were allegedly forged locally to allow them

Judges Tired of Bank BS

In this Georgia superior court opinion, the judge had quite a lot to say.Phillips-vs-US-Bank-Homeowners-are-3rd-Party-Beneficiaries-of-HAMP

Bank Excuses on Foreclosure Growing Stale NY Times, full article here.

The Bank of Americalawyer laid down a patented rhetorical move heard in courts across America. Your Honor, this Orange County, N.Y., homeowner — a New York City police officer — didn’t make enough money to qualify for a mortgage modification. He didn’t send us the right documents.

He didn’t, he didn’t, he didn’t, and so we should be allowed to foreclose.

Justice Catherine M. Bartlett of New York State Supreme Court cut off the lawyer. You, she said, are telling me lies.

“Bank of America got a bailout, and this is an outrage, how this man has been treated,” she said. “Hard-working, middle-class Americans are trying to make it, trying to refinance with your bank.”

Either bank officials show up in person, the justice said, or I’m going to order them “here in handcuffs.”

Rage has acquired a cleansing power. Patience as a virtue is a hard sell at the burnt end of a four-year economic collapse. Zuccotti Park shakes, rattles and rolls; television yakkers chat about inequality; and the federal judge Jed Rakoff all but heckled the Securities and Exchange Commission last week for going easy on Citigroup misbehavior.

Then there is Eric T. Schneiderman, New York’s attorney general, caught in Month 5 of a face-off with the White House. President Obama dearly wants to seal a deal in which the nation’s largest banks toss over a few bales of cash — $20 billion to help with foreclosure relief — and the state attorneys general agree not to pursue sprawling and explosive legal cases against the banks.

Mr. Schneiderman and Attorney General Beau Biden of Delaware, joined by a few others, say no. Banks, they say, should disgorge more documents, testify more precisely and prove more completely that they own millions of mortgage notes. These rebel attorneys general want the banks to hand over more than $200 billion, which would enable the government to write down tens of millions of mortgages.

But in the end, their argument is elemental: Wouldn’t the nation benefit from knowing the truth about the behavior of banks and bankers?  

“If you don’t air out the policies that led to the implosion of the economy, it will happen again,” says Mr. Schneiderman. “There’s not one sentence in the proposed agreement, not one period or comma about the stuff that blew up the economy. We can’t let the banks rewrite history.”

Links On the Big Lie About the Housing Crisis

The Big Lie Goes Viral by Barry Ritzholtz

One group has been especially vocal about shaping a new narrative of the credit crisis and economic collapse: those whose bad judgment and failed philosophy helped cause the crisis.

Rather than admit the error of their ways — Repent! — these people are engaged in an active campaign to rewrite history. They are not, of course, exonerated in doing so. And beyond that, they damage the process of repairing what was broken. They muddy the waters when it comes to holding guilty parties responsible. They prevent measures from being put into place to prevent another crisis.

Here is the surprising takeaway: They are winning. Thanks to the endless repetition of the Big Lie.

A Big Lie is so colossal that no one would believe that someone could have the impudence to distort the truth so infamously. There are many examples: Claims that Earth is not warming, or that evolution is not the best thesis we have for how humans developed. Those opposed to stimulus spending have gone so far as to claim that the infrastructure of the United States is just fine, Grade A (not D, as the we discussed last month), and needs little repair.

Wall Street has its own version: Its Big Lie is that banks and investment houses are merely victims of the crash. You see, the entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage or misguided compensation packages, but rather long-standing housing policies that were at fault.

Indeed, the arguments these folks make fail to withstand even casual scrutiny. But that has not stopped people who should know better from repeating them.

Bloomberg’s Awful Comment by Mike Konczal

My sense is that these are people who can’t accept that some markets, especially financial ones, are disasters when completely unregulated – and thus find any far-fetched excuse to blame the government.  But since we are going to hear a lot of it in 2012, how should one respond to the line that Congress and Fannie/Freddie caused the housing crisis?

1. The first thing to point out is that the both the subprime mortgage boom and the subsequent crash are very much concentrated in the private market, especially the private label securitization channel (PLS) market.  The GSEs were not behind them.  That whole fly-by-night lending boom, slicing and dicing mortgage bonds, derivatives and CDOs, and all the other shadiness of the 2000s mortgage market was a Wall Street creation, and that is what drove all those risky mortgages.

2.The next thing to mention is that the “affordability goals” of the GSEs, as well as the Community Reinvestment Act (CRA), didn’t cause the problems.

3.  This is not exactly an obscure corner of the wonk world – it is one of the most studied capital markets in the world.  What has other research found on this matter?  From Min:

Did Fannie and Freddie buy high-risk mortgage-backed securities? Yes. But they did not buy enough of them to be blamed for the mortgage crisis

4.  For fun, we should mention that the conservative think tanks spent the 2000s saying the exact opposite of what they are saying now, and the opposite of what Bloomberg said above.  They argued that the CRA and the GSEs were getting in the way of getting risky subprime mortgages to risky subprime borrowers.

5.  There’s an argument that the GSEs had huge subprime exposure if you create a new category that supposedly represents the risks of subprime more accurately.  This new “high-risk” category is associated with a consultant to AEI named Ed Pinto, and his analysis deliberately blurs the wording on “high-risk” and subprime in much of his writings.

6. The three Republicans on the FCIC panel rejected the “Blame the GSEs/Congress” approach in their minority report.  Indeed, they, and most conservatives who know this is a dead-end, tend to do a “it’s a whole lot of things, hoocoodanode?” approach.


Non-Judicial Foreclosure Doesn’t Keep Up With Modern Realities

Check out an excerpt from a recently published Issue Brief from the American Constitution Society for Law and Policy,

An Evolving Foreclosure Landscape:

The Ibanez Case and Beyond

By Peter Pitegoff and Laura Underkuffler

October 2011

Attempts by property owners to negotiate settlements and avoid foreclosure have been stymied repeatedly by the claims of remote third parties and loan servicers who claim that they have no authority to negotiate. To force production of proof of the right to foreclose, and to require good faith participation by lenders in negotiation, judicial oversight is critical. In addition, the obligation to invoke judicial oversight of the foreclosure process should rest with the foreclosing party. The property owner, with generally little information and less expertise, should not be in the position of having to hire a lawyer to stop the foreclosure process and invoke the court’s protection. If a remote assignee or securitization trustee desires to foreclose, it should be required to file a court action to do so.

The logic behind this principle is obvious in those jurisdictions that require judicial supervision and approval of all foreclosure actions. However, it is not traditionally a part of the law in those jurisdictions that do not require a claimed mortgage holder to submit to the judicial process. In the approximately 29 “non-judicial foreclosure” states, a mortgage holder is empowered to proceed to foreclosure and sale if the mortgage grants the lender that power. Since “non-judicial sale” is a mortgage term that homeowners are very unlikely to appreciate, or feel that they can negotiate, it is safe to assume that most mortgage loans in those states grant lenders that power. Indeed, in the cases of the Ibanez and LaRace loans, the properties were foreclosed and sold prior to any judicial involvement. Judicial scrutiny of the foreclosures in those cases occurred only because –months after the sale – the purported mortgage holders chose to initiate quiet title actions. Had they not done so, it is highly unlikely that proof of the right to foreclose, required by the Ibanez court, would ever have been required.54

“Non-judicial foreclosure” statutes are based on the assumption that mortgage foreclosures are relatively simple affairs between two contracting parties, with relatively simple facts about payment. This might have described most residential mortgage transactions twenty years ago. However, in the world of real estate financing in the twenty-first century, this model reflects none of the realities of most transactions. To give claimed mortgage holders the right to foreclose and sell the properties – unless homeowners can guess that the foreclosing party is unauthorized, and know that they have the right to negotiation, and can afford to hire an attorney to file in court – is unrealistic in today’s world and represents poor public policy.

(emphasis mine).  I wish AZ judges would get the memo.

The Meme of the “Omnipotent Irresponsible Homeowner”

Abigail Field dispels the fog of the blame game.  I am excerpting one of her newest articles.  She always nails it.  Please go read the  Full article here on her blog Reality Check, truly excellent work, as always:

Somehow the banking industry has convinced much of the public and most of our political leaders that our housing and foreclosure crisis is the fault of irresponsible borrowers despite the overwhelming evidence that greedy bankers are to blame. Since good policy can’t happen unless people escape the bankers’ web of misinformation and spin, I thought it would be appropriate to synthesize what we’ve learned about the greed-driven decisions of bankers and Wall Street traders and what they reveal about how we got where we are now.

Chasing Illegal Profits in the Mortgage World: MERS

Whether from hubris, incompetence or both, the creation and widespread use of MERS maximized corporate profits and executives’ personal wealth at the expense of the rest of us. MERS has damaged our records of who owns which parcel of America, and the millions of dollars lost by counties across the country has resulted in less services and higher taxes.

Chasing Illegal Profits in the Mortgage World: Robosigning

By fragmenting a very important legal process–the transfer of ownership of land or other rights in it–into discrete, meaningless steps that low skill workers could mechanically complete, over and over, banks saved tons of money but made a mockery of Due Process, the rules of evidence, and the entire concept that they had to follow the same laws everyone else did.

I mean, imagine if borrowers committed wholesale document fraud, filing false affidavits, forged documents and other worthless bits of paper with our courts. People would go to jail. I mean, robosigning notaries were forced to plead The Fifth, but I’ve heard nothing about investigating the executives that demanded the notaries’ practices. Indeed, the top bankers act as if their document fraud was meaningless.

The idea that our biggest, most powerful corporations don’t have to play by the same rules as everyone else is incredibly dangerous.

Chasing Illegal Profits in the Mortgage World: Foreclosure Mills

Beyond MERS and robosigning, the mortgage industry saved itself tons of money by deploying fleets of foreclosure attorneys via the “network attorney” business model. Most lawyers wouldn’t recognize the activities these firms consider the practice of law. The clients respected these attorneys so little that they had intermediaries communicate with them purely by computer message–virtually no direct client-attorney contact–and graded them on speed, on quantity over quality. Mass foreclosure counsel were treated, essentially, as high level robosigners.

Fraudulent Lending to Feed the Securitization Machine

So MERS, robosigning and ‘network attorneys’ are the mortgage industry’s early and major contribution to our present mortgage and foreclosure crisis. Another key contribution of the mortgage industry was knowingly making lousy loans.

People, fed the bankers’ spin, envision greedy borrowers deceiving innocent loan officers into making loans that couldn’t be repaid. But that’s just not true. Beyond the fact that loan underwriting should prevent all but the most sophisticated fraudulent borrowers from fooling lenders–and surely competent underwriting is a basic duty banks owe their shareholders–evidence is mounting of decisions to systematically to make bad loans.

Wall Street’s Crucial Role

Securitization Fail: The Mother of All Wall Street Greed Driven Screw Ups

How blinded by greed and careless did Wall Street get? So careless it ignored virtually every key provision of its securitization contracts. Seriously. As the Ambac suit (and many others) detail, the loans in the securities weren’t close to the promised quality. But other provisions that governed the most critical feature of securitizations, namely, actually giving the trust ownership of the loans, and thus investors the right to collect payments from the loans, appear to have been violated either routinely, or, at least often enough to cause massive problems.

Cooking the Books Still?

In a must-listen podcast, Martin Andelman interviews Talcott Franklin, the lawyer for a majority of securitization investors. Among many other topics, Tal discusses how mortgage servicers aren’t always recognizing the losses the securities are incurring, which means that the owners of the riskier slices of the securities are getting paid money that should be saved to pay the top, AAA-rated tier. As a result, Tal says, the AAA investors–main street, via pension funds and life insurance policies–are going to take much bigger losses than they should. And it means that the servicers–who often own these riskier slices–are making their balance sheets look better than they are.

Gambling with Other People’s Money

An even more important economy-wrecker, beyond executive compensation-driven stuffing of securities full of crappy loans and failing to even do that properly, are the bets Wall Street traders made on those securities. Those bets were particularly damaging because of “leverage.” Leverage meaning money borrowed from other people to increase the size of the bets, magnifying both wins and losses. A Wall Street trader’s use of “leverage” is functionally the same as a casino gambler maxing out his credit card cash advances to make his “sure thing” pay off big.

Foreclosure Review FAQ

Our firm is planning to research the complaint process and walk clients through it as a service.  Call for an appointment to discuss.  Here are the FAQs prepared by the researchers at propublica.org.  Their full article is here.

Q. Who is eligible for the reviews?

You have to meet all of the following criteria:

  1. The home is/was your primary residence. Vacation homes or investment properties will not be eligible.
  2. You were in the foreclosure process at any time between Jan. 1, 2009, and Dec. 31, 2010. The review is NOT limited to people who actually lost their homes to foreclosure in that time period. All that matters is that you were in foreclosure at any point during that time frame. You might have eventually avoided foreclosure by getting a modification; you might still be in foreclosure; you might have sold your home. The final outcome doesn’t matter. All that matters is that you were in the foreclosure process at some point in 2009 or 2010.
  3. Your mortgage servicer — the company you sent payments to and that handled your request for a modification — in 2009 or 2010 was one of the following companies, listed here in alphabetical order:
    • America’s Servicing Co.
    • Aurora Loan Services
    • BAC Home Loans Servicing (a subsidiary of Bank of America)
    • Bank of America
    • Beneficial
    • Chase
    • Citibank
    • CitiFinancial
    • CitiMortgage
    • Countrywide
    • EMC Mortgage
    • EverBank/Everhome Mortgage
    • GMAC Mortgage
    • HFC (now HFC Beneficial)
    • Home Loan Services (a subsidiary of Bank of America)
    • HSBC
    • IndyMac Mortgage Services (part of OneWest Bank)
    • Litton Loan Servicing*
    • MetLife Bank
    • National City Mortgage
    • PNC Mortgage
    • Sovereign Bank
    • SunTrust Mortgage
    • U.S. Bank
    • Wachovia Mortgage
    • Washington Mutual (WaMu)
    • Wells Fargo Bank
    • Wilshire Credit (a subsidiary of Bank of America)

*Regulators acted on Litton Loan Servicing later than on the others, so the foreclosure review for Litton customers has not yet begun. The Federal Reserve — the regulator for Goldman Sachs, which owned Litton during the relevant time period — could not tell us when the process would begin for Litton. We will update this post when we hear more about this.

Q. Who is conducting these reviews?

Under the supervision of regulators, the banks have hired consultants to conduct the reviews. Regulators say the consultants will be independent and answer to them, not to the banks. Regulators have kept the identities of these consultants secret but say they will divulge them in November. We will update this FAQ when that happens.

Q. How do I submit a complaint so that I’m included in this process?

You have to submit a Request for Review Form postmarked no later than April 30, 2012.

You can get a Request for Review Form two different ways. First, you might receive a letter from your servicer with the form included. Those letters will be mailed out sometime before the end of 2011. If for some reason you don’t receive one, you can also request a form by calling 1-888-952-9105 (Monday through Friday, 8 a.m. to 10 p.m. or Saturday, 8 a.m. to 5 p.m. Eastern time.). The form will have a “control number” specific to your individual case, so you can’t get a copy of it elsewhere, not even online.

You can see a sample version of this form here so you’ll know what to expect. It is being mailed to homeowners with something like this notice. But again, you need to obtain a form that’s specific to your request.

Q. What abuses or errors are covered by this review?

The short answer: There is no comprehensive list. But based on what regulators have said, there are some areas of focus. If any of the following things happened to you, you will probably have a better shot at receiving some form of compensation if you clearly describe them on the Request for Review Form and provide any supporting documentation.


    • Your servicer didn’t properly consider you for a modification.
    • You were in a trial modification, were making payments, but were foreclosed on anyway without having been denied a permanent modification.
    • You were doing everything a permanent modification agreement required, but the foreclosure sale still happened.
    • You requested assistance/modification, submitted complete documents on time, and were waiting for a decision when the foreclosure sale occurred.

Calculation errors or incorrect charges:

    • You were charged bogus fees and/or penalties.
    • Mortgage payments were inaccurately calculated, processed or applied. It would be especially noteworthy if the foreclosure process began because your servicer incorrectly processed your payments.
    • The mortgage balance amount at the time of the foreclosure action was more than you actually owed.

Legal and documentation issues:

  • Your servicer didn’t properly document ownership of the promissory note or mortgage when the foreclosure was initiated.
  • Your servicer didn’t follow state or federal laws when it pursued foreclosure. (This would include not sending you the proper notices).


  • The foreclosure action occurred while you were protected by bankruptcy.
  • Your servicer violated the Servicemembers Civil Relief Act. For instance, you were in the military and on active duty when your servicer pursued foreclosure. Under the act, the ban on foreclosure runs for nine months following active duty.

Q. What will happen after I submit my complaint?

You should receive an acknowledgment letter within one week. Then you wait. The reviewer may contact you for more information at some point. You will not be interviewed, however. Eventually, you will receive a letter that lays out what compensation you are being offered and “the findings of the review.” Regulators said they haven’t decided precisely what form these letters will take and in what detail they will discuss your complaint.

Q. How long will the review take?

Regulators won’t say. We will update this FAQ when they give some indication.

Q. What sort of compensation might I receive?

Regulators have not provided any information about this. You might receive cash, and you might get some sort of nonfinancial compensation like having your credit report repaired. The only clear guiding principle is the focus on “financial injury” to the homeowner. But regulators said they have not yet determined how that will be calculated.

Q. Will I have to waive my right to sue my servicer in exchange for receiving this compensation?

That’s not yet clear.

Q. Can I appeal if I disagree with the findings of the review?