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.