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
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?
Q. So Countrywide had possession of the documents from the
Q. And subsequently did Countrywide transfer these
documents by assignment or an allonge?
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?
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
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.