At Bank of America, more incomplete mortgage docs raise more questions
Fortune examined hundreds of foreclosure documents to determine the validity of mortgage securitizations after Bank of America debunked testimony about them last fall. The results raise more questions than they answer.
By Abigail Field, contributor June 3, 2011 11:49 AM ET
FORTUNE -- Are Countrywide mortgage-backed securities really mortgage-backed? Do banks even have the legal right to foreclose on certain homes?
These are just a few of the questions raised since the foreclosure crisis revealed shoddy mortgage servicing practices at many of the big banks – practices that have led to countless investigations and lawsuits. Court testimony by a former Countrywide employee added to the intrigue last fall, because she confessed that many loans there weren't properly handled, bringing into doubt the validity of Countrywide's securitization process. Bank of America, which owns Countrywide, quickly silenced the discussion with firm denials.
But Fortune has examined dozens of court records that corroborate the employee's testimony. And if Countrywide's mortgage securitizations systematically failed as it appears they did, Bank of America's potential liability dwarfs its shareholder equity, as the Congressional Oversight Panel points out [ http://mattweidnerlaw.com/blog/wp-content/uploads/2010/11/CongressionalForeclosureReport11-16-101.pdf ].
Last November, a decision in a New Jersey bankruptcy case brought to light the testimony of Linda DeMartini [ http://www.scribd.com/doc/43582702/101116-Kemp-v-CountryWide-NJ ], operational team leader for the litigation management department for Bank of America, which intended to prove the bank had the right to foreclose on a debtor's mortgage. Instead, her testimony was key to the judge's ruling that Bank of America (BAC) couldn't foreclose, and along the way DeMartini made two statements that called into question the securitization of Countrywide loans. She testified that Countrywide didn't deliver the notes to the securitization trustee, and that Countrywide notes weren't endorsed except on a case-by-case basis generally long after securitization ostensibly occurred. Both steps are required, in one form or another, under all securitization contracts.
Bank of America vigorously denied DeMartini's testimony, insisting that as a member of Countrywide's mortgage servicing department, she didn't know what was happening during securitization. Besides, BofA insisted, its policy was and always has been to comply with the securitization contracts.
No endorsements
Although law enforcement should be able to answer the delivery question easily -- DeMartini indicated that Bank of America has FedEx tracking records for each note -- it's impossible for the public to check. But the endorsement of notes is easy to test. In every foreclosure, the bank must give the court the note or an accurate copy of it. And those notes are either properly endorsed or they're not.
To check DeMartini's testimony, Fortune examined the foreclosures filed in two New York counties (Westchester and the Bronx) between 2006 and 2010. There were 130 cases [ http://www.scribd.com/doc/56407032/Countrywide-Foreclosures-Without-Endorsements ] where the Bank of New York (BK) was foreclosing on behalf of a Countrywide mortgage-backed security. In 104 of those cases, the loan was originally made by Countrywide; the other 26 were made by other banks and sold to Countrywide for securitization.
None of the 104 Countrywide loans were endorsed by Countrywide – they included only the original borrower's signature. Two-thirds of the loans made by other banks also lacked bank endorsements. The other third were endorsed either directly on the note or on an allonge, or a rider, accompanying the note.
The lack of Countrywide endorsements, combined with the bank's representation to the court that these documents are accurate copies of the original notes, calls into question the securitization of these loans, as well as Bank of New York's right, as trustee, to foreclose on them. These notes ostensibly belong to over 100 different Countrywide securities and worse, they were originally made as long ago as 2002. If the lack of endorsement on these notes is typical -- and 104 out of 104 suggests it is -- the problem occurs across Countrywide securities and for loans that pre-date the peak-bubble mortgage frenzy.
The lack of Countrywide endorsements also corroborates DeMartini, who said that in her 10 years at Countrywide she had never seen a note with an endorsement, and that as foreclosures had been increasingly litigated, she had been handling the original notes, not just the copies scanned into the bank's database.
Bank of New York maintains that it had the right to foreclose on the notes. "The assignment language included in the pooling and servicing agreements that govern the trusts, along with the actual transfer of the mortgage note to the trustee and/or custodian, provide the trustee with the proper legal standing," Bank of New York spokesman Kevin Heine said in a statement. But even if true, the right to foreclose must be demonstrated in every case, and it doesn't seem to have been in any of these cases from New York.
As for the endorsements, foreclosure defense attorneys say a troubling phenomenon has been happening: "magically" appearing endorsements. That is, the note originally given the court has no endorsement, but after the defense points out the problem, an endorsed note is submitted. Here [ http://www.scribd.com/doc/56410540/Suddenly-Appearing-Endorsements ] are several examples from Florida cases, all involving loans serviced by Countrywide, half of which were also made by Countrywide. Here [ http://www.scribd.com/doc/56410810/Suddenly-Appearing-Endorsements-2 ] is an example from a California bankruptcy case.
Todd Allen, the Florida attorney who shared the Florida examples, says the problem occurred with all the banks, not just Countrywide: "Magically appearing endorsements happen so often in Florida that I expect the banks' explanation to begin with: 'Once upon a time, in a land far, far away.' Unfortunately, the courts often turn a blind eye to the banks' shell game and homeowners are left with the empty shell."
Bank of America continues to deny that it failed to endorse mortgages as DeMartini claimed, even after seeing the cases Fortune uncovered from New York. It issued this statement in response: "Bank of America's policy is to conduct foreclosures in accordance with all applicable laws. After halting foreclosures last year, we reviewed our process with regulators and continue to do so as we incorporate improvements. Reviews have shown that foreclosed loans were seriously delinquent and that we could support our legal standing to foreclose. We believe the files referenced contain appropriate documentation. We offer home retention options and foreclosure avoidance programs to our distressed customers. Foreclosure is our last resort."
It will be left to the investigators – and possibly ultimately the courts – to decide whether the applicable laws were indeed followed. Meanwhile, Countrywide managers have given interviews to Moody's Investor Service, which led Moody's to reassure investors that notes were systematically endorsed, either in blank on the note or via allonge.
But if that's accurate, why don't the sampled court records reflect it?
Western Funds Are Said to Have Managed Libyan Money Poorly
By DAVID ROHDE Published: June 30, 2011
Prominent American and European investment funds managed hundreds of millions of dollars in Qaddafi regime assets poorly, charging tens of millions of dollars in fees and producing low returns, according to a document obtained by the advocacy group Global Witness. The banks appeared to have taken advantage of a Libyan investment fund that was poorly managed and "a mess," according to a western official who spoke on condition of anonymity.
The document, a September 2010 summary of Libyan Investment Authority assets, showed poor performance by European and American money managers and a Libyan with close ties to the Qaddafi regime. Libyan Investment Authority officials complained that a $1.7 billion investment they made in six different funds generated returns far below the industry benchmark.
“To date, we have paid in excess of $18 million in fees, for losing us $30 million,” the report says at one point, referring to a fund reportedly managed by the son-in-law of the head of Libya’s state oil company.
The report, prepared by the London office of the consulting firm KPMG, shows that a $300 million Libyan investment in Permal, a hedge fund that is a unit of the Baltimore-based Legg Mason, lost 40 percent of its value from January 2009 to September 2010. At the same time, Permal received $27 million in fees. “Consistently negative performance since inception,” Libyan officials said in the report. “Very high fees for no value.”
The Libyans voiced similar complaints about investments in funds managed by European firms that also lost value. Despite producing low returns, the Dutch firm Palladyne received $19 million in fees, the French bank BNP Paribas earned $18 million, Credit Suisse took $7.6 million and the Swiss firm Notz Stucki had $5 million. KPMG analysts also warned that the Libyan Authority’s investment in such funds was too high compared with other types of investments.
Representatives for the firms declined to respond publicly or could not be reached for comment. KPMG declined to comment, but The New York Times was able to independently verify the document’s authenticity.
An official at one firm criticized in the report, who spoke anonymously, blamed the poor investments on middlemen and denied that the firm had received high fees. “It’s not as straightforward a picture as it perhaps should be,” the official said.
In 2008, Goldman Sachs lost more than $1 billion in Libyan Investment Authority money in currency and other trading, The Wall Street Journal reported in May. The Securities and Exchange Commission is investigating whether an offer by Goldman to pay a $50 million fee as part of a package to help the fund recoup its losses violated American bribery laws. Goldman has denied any wrongdoing and declined to comment on Thursday.
Doing business with Libya was legal for American companies from 2004 to 2011. American banks, oil companies and construction companies rushed to do business in Libya after Col. Muammar el-Qaddafi renounced terrorism and halted his attempt to develop nuclear weapons and the Bush administration lifted sanctions in 2004. The Obama administration reimposed sanctions in February after the Qaddafi regime began brutally repressing an uprising in the country.
The creation of the Libyan Investment Authority in 2006 set off a frenzy in banking circles. Leading financial firms scrambled for the opportunity to manage the authority’s $40 billion in assets.
Managing the sovereign wealth funds for oil-rich states — some of which are authoritarian — is an enormous business for Western banks. For example, the Libyan Investment Authority’s total assets grew by $10 billion over three months, to $64 billion in September 2010 from $54 billion in June, according to the newly released document.
The document also showed that the British bank HSBC became the Qaddafi regime’s largest Western banking partner in September 2010, receiving $1.4 billion in Libyan money. The document showed that the amount of Libyan state oil money managed by HSBC soared to $1.42 billion in September 2010 from $282 million in June 2010. The document also corroborated a document leaked by Global Witness in May showing that Goldman Sachs managed about $45 million and JPMorgan Chase about $173 million for the Libyan regime in 2010. Société Générale and other European banks also helped the Qaddafi regime manage oil proceeds.
Under current American and British law, the business relationships between sovereign wealth funds and Western banks can be kept secret. In a statement, Global Witness called for such dealings to be made public so that citizens of oil-rich and Western countries could understand what was taking place.
“Banking secrecy laws still mean that citizens are left in the dark about how their own state’s funds are managed,” said Robert Palmer, a campaigner at Global Witness. “We can’t continue with a situation where information about how a state handles its assets is only made available once a dictator turns violently on his own people and information is leaked.”
Evidence of cronyism appears in the report as well. The state fund invested $300 million in a Palladyne fund managed by the son-in-law of the head of Libya’s state oil company, according to The Wall Street Journal.
Forty-five percent of the $300 million investment was held in cash, the report said. In addition to losing $30 million while charging $18 million in fees, the fund performed 39 percent below a worldwide index of similar funds.
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