Choice Excerpt of New Lawsuit Filed By Investors Against Countrywide, Bank of America and the Gang

H.       Countrywide Failed To Ensure That Title To The Underlying Loans Was Effectively Transferred 

146.    An essential aspect of the mortgage securitization process is that the issuing trust

for each MBS offering must obtain good title to the mortgage loans comprising the pool for that

offering.    This  is  necessary  in  order  for  the  MBS  holders  to  be  legally  entitled  to  enforce  the

mortgage  loans  in  case  of  default.    Two  documents  relating  to  each  mortgage  loan  must  be

validly  transferred  to  the  trust  as  part  of  the  securitization  process  –  a  promissory  note  and  a

security instrument (either a mortgage or a deed of trust).    

147.    The  rules  for  these  transfers  are  governed  by  the  law  of  the  state  where  the

property  is  located,  by  the  terms  of  the  pooling  and  servicing  agreement  (“PSA”)  for  each

securitization, and by the law governing the issuing trust (with respect to matters of trust law). 

Generally,  state  laws  and  the  PSAs  require  the  promissory  note  and  security  instrument  to  be

transferred by indorsement, in the same way that a check can be transferred by indorsement, or

by sale.  In addition, state laws generally require that the trustee have physical possession of the

original, manually signed note in order for the loan to be enforceable by the trustee against the

borrower in case of default.

148.    In order to preserve the bankruptcy-remote status of the issuing trusts in RMBS

transactions,  the  notes  and  security  instruments  are  generally  not  transferred  directly  from  the

mortgage loan originator to the trust.  Rather, the notes and security instruments are generally

initially  transferred  from  the  originator  (e.g.,  Countrywide  Home)  to  the  depositor  (e.g.,

CWALT), either directly or via one or more special-purpose entities established by Countrywide

Financial.  After this initial transfer to the depositor, the depositor transfers the notes and security

interests  to  the  issuing  trust  for  the  particular  securitization.    Each  of  these  transfers  must  be

valid under applicable state law in order for the trust to have good title to the mortgage loans.  

149.    In addition, the PSA generally requires the transfers of the mortgage loans to the

trust to be completed within a strict time limit after formation of the trust in order to ensure that

the trust qualifies as a tax-free real estate mortgage investment conduit (“REMIC”).  

150.    The applicable state trust law generally requires strict compliance with the trust

documents, including the PSA, so that failure to comply strictly with the timeliness, indorsement,

physical delivery, and other requirements of the PSA with respect to the transfers of the notes

and  security  instruments  means  that  the  transfers  would  be  void  and  the  trust  would  not  have

good title to the mortgage loans.

151.    The  Offering  Documents  for  each  offering  of  the  Certificates  represented  in

substance  that  the  issuing  trust  for  that  offering  had  obtained  good  title  to  the  mortgage  loans

comprising  the  pool  for  the  offering.    In reality,  however,  Countrywide  routinely  failed  to

comply  with  the  requirements  of  applicable  state  laws  and  the  PSAs  for  valid  transfers  of  the

notes and security instruments to the issuing trusts.  In Kemp v. Countrywide Home Loans, Inc.,

Bkrtcy.  No.  08-18700  (D.N.J.),  Countrywide  sought  to  prove  that  the  Bank  of  New  York,  as

trustee for an RMBS issuing trust that purportedly held Mr. Kemp’s mortgage, was entitled to

enforce  the  mortgage.    Countrywide  presented  testimony  by  Linda  DeMartini,  who  had  been

employed  by  Countrywide  Servicing  for  almost  ten  years  as  of  August  2009  and  was  then  a

supervisor   and   operational   team   leader   for   the   Litigation   Management   Department   of

Countrywide  Servicing.    Ms.  DeMartini  testified  that,  in  her  extensive  career  in  the  mortgage

loan servicing business of Countrywide, “I had to know about everything . . . .”  She testified that

Countrywide Home originated Kemp’s loan in 2006 and transferred it to the Bank of New York

as trustee for the issuing trust, but that Countrywide Servicing retained the original note in its

own possession and never delivered it to the Bank of New York because Countrywide Servicing

was the servicer for the loan. 

152.    Even though DeMartini was presented by Countrywide as a witness in an attempt

to prove that the loan documents had been validly transferred to the issuing trust, her testimony

actually  proved  that  the  loan  documents  were  never  validly  transferred.    She  testified  that  an

allonge to the promissory note, which purported to transfer the note to the trust by indorsement,

was prepared only in preparation for the litigation in 2009, long after the purported transfer of

the note to the trust in 2006, and was never delivered to the trustee.  Indeed, she testified that

there was no ordinary business practice of signing an allonge at the time a note was purportedly

transferred.  

153.    DeMartini  also  testified  that  the  original  note  was  retained  by  Countrywide  and

was never delivered to the trustee.  Most significantly, she testified on direct examination that

not delivering the original note to the trustee was Countrywide’s standard business practice:

Q.        Ms.  DeMartini,  is  it  generally  the  custom  to  –  for  your

investor [i.e., the issuing trust] to hold the documents?

A.        No.  They would stay with us as the servicer.

Q.        And are documents ever transferred to the investor?

A.        If  we  service-release  them  they  would  be  transferred  to

whomever we’re service-releasing them to.

Q.        So  I  believe  you  testified  Countrywide  was  the  originator

of this loan?

A.        Yes.

Q.        So Countrywide had possession of the documents from the

outset?

A.        Yes.

Q.        And    subsequently    did    Countrywide    transfer    these

documents by assignment or an allonge?

A.        Yes.

Q.        And –  

 A.        Well, transferred the rights, yes, transferred the ownership,

not the physical documents.

Q.        So   the   physical   documents   were   retained   within   the

corporate entity Countrywide or Bank of America?

A.        Correct.

Q.        Okay.    And  would  you  say  that  this  is  standard  operating

procedure in the mortgage banking business?

A.        Yes.  It would be normal – the normal course of business as

the reason that we are the servicer, as we’re the ones that are doing

all the servicing, and that would include retaining the documents.

154.    In  response  to  questioning  by  the  Bankruptcy  Judge,  DeMartini  again  testified

that “I do know that it is our normal course of action with the loans that we service that we are

the ones that retain the – that we retain those documents.”  In response to the Court’s question

whether the documents are “ever moved to follow the transfer of ownership,” DeMartini testified

that “it is not customary for them to move.”

155.    At a subsequent hearing in September 2009, Countrywide’s counsel stated that

[A]lthough . . . 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.

156.    Based on the evidence quoted above, Chief Bankruptcy Judge Judith H. Wizmur

held  in  November  2010  that  the  Bank  of  New  York,  as  trustee  for  the  issuing  trust,  could  not

enforce the mortgage loan for two reasons:

First,  under  New  Jersey’s  Uniform  Commercial  Code  (“UCC”)  provisions,  the

fact that the owner of the note, the Bank of New York, never had possession of

the  note,  is  fatal  to  its  enforcement.    Second,  upon  the  sale  of  the  note  and

mortgage  to  the  Bank  of  New  York,  the  fact  that  the  note  was  not  properly

indorsed to the new owner also defeats the enforceability of the note. Kemp  v.  Countrywide  Home  Loans,  Inc.,  No.  08-18700-JHW,  Slip  Op.,  at  *10-11  (Bkrtcy.

D.N.J. Nov. 16, 2010).  Judge Wizmur further held that Countrywide Servicing also could not

enforce the mortgage loan, because as an agent for the owner of the note, Countrywide Servicing

had no more authority to enforce the note than its principal, the Bank of New York.  Id. at *21.

157.    As  DeMartini  testified,  Countrywide  routinely  did  not  transfer  the  original

mortgage  loan  documents  to  the  issuing  trusts  for  MBS  transactions,  but  rather  retained  the

original documents itself.  Thus, Defendants failed to validly transfer the promissory notes and

security  instruments  for  many  of  the  mortgage  loans  underlying  the  Certificates  purchased  by

Plaintiffs to the issuing trusts for the Certificates.

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