Countrywide's Mortgage Document Errors May Doom Bank of AmericaTestimony in a New Jersey foreclosure case decided last week may spell big trouble for Bank of America (BAC). If what one bank employee said on the stand proves to be accurate, paperwork problems it acquired when it purchased the failing mortgage provider Countrywide in 2008 could leave BofA on the hook for billions of dollars.

As first reported by Kate Berry for American Banker, Linda DiMartini, a supervisor and operational team leader for the Litigation Management Department of BAC Home Loans Servicing, testified in the foreclosure case of John T. Kemp that it was "customary for Countrywide to maintain possession of the original note and related documents."

If that's true, then Bank of America may discover that it has millions of loans on its books that it thought it had transferred to trusts that issued mortgage backed securities, because 96% of Countrywide loans were ostensibly securitized. As the Congressional Oversight Panel explained, that outcome alone could cause massive damage to a bank's balance sheet. And as bad as that would be, it isn't the only problem that could result from Countrywide hanging on to the notes.

If the mortgage-backed securities aren't in fact "mortgage-backed," investors who bought them could be able to force BofA to buy the securities back. A significant number of buybacks could on its own destroy BofA's balance sheet. Nor could BofA stave off either outcome retroactively by delivering those notes today. First, the contracts that created the trusts would typically forbid transferring the loans into the trusts now. Second, even if somehow that could happen, such a transfer would destroy the special tax status the mortgage backed securities enjoy and give the investors a different reason to put back the securities or sue over them.

Retaining Documents While Servicing the Loans

At oral argument, BofA's attorney conceded that DiMartini's testimony was accurate and that as a result, BofA had failed to deliver the note at issue in that case to the trust under the contract or otherwise applicable law:
"[A]lthough Your Honor is right and the UCC and the Master Servicing Agreement apparently requires [physical delivery of the note to the trustee], 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."
The judge ominously replied: "They take their chances."

Bank of America, via its spokesman Larry Platt, who is a partner at K&L Gates in Washington, told DailyFinance:
"Countrywide's policy and practice has been and remains to fully comply with the pooling and servicing agreements, including forwarding any necessary documents to the trustee. The associate whose testimony was cited in the ruling was asked about a process outside her normal scope of responsibilities and in an entirely different department from where she worked. A review of her testimony shows she later clarified that she was not comfortable testifying about the circumstances under which original loan documents would move, or whether and to what extent they ever are moved. This would include the initial delivery of original loan documents to the trustee."
Bruce Levitt, the attorney representing Kemp commented:
"DeMartini was flown to New Jersey from California to testify as the document custodian, the person BofA chose to get the note and other documents admitted as evidence. She was refreshingly unrehearsed; she testified with confidence and candor. She wanted the judge to understand that BofA was very careful with the notes."
Moreover, if Platt is right and Countrywide always delivered the notes, why did BofA's attorney in the Kemp case make the admission to the contrary quoted above?

If Countrywide didn't deliver the notes, how many loans are at issue? Well the loan in question in the specific court case -- Kemp v. Countrywide Home Loans -- was supposedly securitized in June 2006. So securitizations involving Countrywide loans for at least some time before that date and certainly thereafter are affected. And this case begs the wider question: Is it really possible that it was only Countrywide that followed the practice of not physically delivering the documents of securitized mortgages?

"There's been talk on the street for years that banks didn't send the notes up the line when they did securitizations," explained Max Gardner, a consumer bankruptcy attorney not affiliated with this case but who has litigated foreclosures based on bad bank documents for years. "But this is the first time I've seen someone under oath admit there was a policy not to deliver the notes. I had to read it twice to make sure that's really what she said, but she did: It was customary."

The Kemp Case

Bank of America made at least three attempts to fix its note problem in the context of the Kemp bankruptcy case. To prove it had the right to foreclose on Kemp's house, BofA needed to show that Bank of New York, the trustee for the 2006 securitization, had the right to foreclose. If BoNY had the right to foreclose, BofA could foreclose on its behalf. But for BoNY to have that right, the trust had to have the note and mortgage, which is why Countrywide's hanging on to the notes was a problem.

One effort BofA made was to file an assignment of mortgage and note to BoNY from March 2007. But under the contracts for securitizations in general -- those under New York law, which is most of them -- that assignment would have been too late, and thus void. The judge didn't address that issue, simply noting that the note wasn't delivered, so the assignment didn't cure BofA's problem.

DiMartini also admitted that another document -- an "allonge" -- that BofA submitted to try to solve its note problem hadn't been created in 2006, as BofA was implicitly suggesting by giving it to the court, but had been created only a few weeks before, specifically for the Kemp trial. And created sloppily at that: It referred to the trust as "6006-8" instead of "2006-8." Again, the judge didn't address all the problems that flowed from the timing of the document's creation because the note was not delivered, which meant that BofA's problem remained.

BofA made at least one additional attempt to solve its note problem: At one point, it filed a "lost note affidavit" claiming the original note had been lost. Given DiMartini's testimony and the bank's later "discovery" of the note, BofA's attorney asked the judge to disregard that filing.

Clouded Title Means No Foreclosure

For Kemp, the upshot of all these document problems is that the claim of Bank of New York via BofA to get paid under Kemp's mortgage was disallowed by the bankruptcy judge.

Assuming the case follows the normal course going forward, that will mean that neither bank will be able to foreclose on Kemp's house, and his mortgage debt will become unsecured debt -- the banks will have to stand in line with the credit card issuers and get paid only a portion of the principal.

If it's true the securitization trusts routinely didn't get notes delivered from Countrywide, then all those properties -- millions of properties -- could have clouded titles. That hurts many people outside of the bank, because clouded title makes selling those properties much harder, and leaves the current owners in a kind of legal limbo. As the Congressional Oversight Panel warned:
Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse. ... If such problems were to arise on a large scale, the housing market could experience even greater disruptions than have already occurred, resulting in significant harm to major financial institutions.
So much for the banks' claims that these paperwork problems are technicalities that will be quickly resolved.

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How do I find out if the note has been paid by insurance policy that an investor had if the borrower defaulted on the loan more then 90 days?

June 25 2013 at 11:55 PM Report abuse rate up rate down Reply

Professor Whaley, I called Bank of America last week and requested my original note as well as ask them to send me a letter in writing that my deed was not cloudy. Bank of America's representative stated that they were Countrywide and had my note which was scan in just like million of other. They stated, that my request was invalid. Please give me some advice.

December 01 2010 at 9:16 AM Report abuse +1 rate up rate down Reply

Couldn't happen to a nicer bank. I hope that Bank of America goes down. All the way down, they are nothing but liars ,cheats,and thieves running BofA and they deserve everthing bad that can happen to them...No Offense...LOL

December 01 2010 at 8:19 AM Report abuse +2 rate up rate down Reply

Obama should keep his promise to Americans and say NO TAX BREAKS FOR THE RICH he said he would tax 250 thousand per year. Contact the White House your Senators and your congressmen and tell them Americans say NO EXTENTIONS PERIOD.

November 30 2010 at 3:14 PM Report abuse rate up rate down Reply

I am a law professor who's written and lectured much lately on the need for the production of the notes in foreclosures. Ms. Field says that in a bankruptcy the banks would end up as unsecured creditors, but that's not quite right. The mortgage still is on the property, but until the original note turns up no one can foreclose. Further, without the note, the bank doesn't even have a claim in bankruptcy, so the credit card creditors, etc., would not have to share at all. On the other hand, the property would exit bankruptcy still with the mortgage lien attached to it, creating a major mess. I discuss all of this on my blog entry "Update: Mortgage Foreclosues and Missing Notes," November 16, 2010, on my blog: Professor Douglas Whaley Moritz College of Law The Ohio State University

November 30 2010 at 10:38 AM Report abuse rate up rate down Reply

Interesting that everyone continues to focus on who to blame. How is finding someone to make accountable going to cure what currently ails the housing market? So, the Trusts are looking for a scape goat. Are the Trusts suggesting they are just now becoming aware that they did not have the Original Notes? Doesn't that create some questions on Trust management practices? Would that not make them equally culpable? After all, these transfers of documents is not a new practice. If Countrywide/B of A had not forwarded original notes, wasn't it the responsibility of the Trust and Securities Underwriter to suspend future acquisitions until receipt of all original notes from a previous deal? Their lack of ACTION then suggests they were accepting the retention practices. Frustrating to think and know that everyone is focused on deflecting responsibility, but in truth, EVERYONE IS EQUALLY RESPONSIBLE.

November 29 2010 at 3:46 PM Report abuse rate up rate down Reply

It couldn't happen to a nicer bunch of crooks. In fact, I would love to see the CEOs of BofA, Wells Fargo, Citibank, JP Morgan Chase, and Morgan Stanley perp-walked in handcuffs from Wall Street to the U.S. District Court in lower Manhattan while tens of thousands of ordinary citizens lined the streets and cheered. Of course this will never happen with shills like Geithner, Summers, and Bernanke, and wimps like Eric Holder, running the show. Bush was wrong but at least he had some guts --- Obama is just plain pathetic.

November 27 2010 at 9:21 PM Report abuse +3 rate up rate down Reply

From my investigating for over a year on this foreclosure matter, what I don't understand is the how comes and the whys. Individuals have accurately post information and have made video's explaining all the goings on with the Lenders and Banks, Why is it that the states don't require the Banks to show they have clear Title with the homes they foreclose on. Meaning they should have the notarized papers in hand and showing the judge that they have a Right to foreclose on. This should be done in a nonjudicial state as well as a judicial state. It behoves the mind that an attorney can go to the courthouse in a nonjudicial state and with no actual proof can foreclose on a home. Don't you think that if they had to produce the Original Note and Deed, there would be no problems in the foreclosures. Those banks and lenders who cannot produce the note or the original paperwork should have been honest with the people. I'm sure their could have been some solution to that problem other then lying and stealing property they don't even own and can't even sell. If I was a congressman and had to listen to these banksters knowing what I know I would have already introduced a Bill to require all banks and lenders to produce the Original Paper Work if not they are would be Required to NOTIFY HOME OWNERS of the missing, lost or destroyed NOTES. The banks would all so be required to go back over each and every foreclosed home to make sure they were foreclosed on legally ... If the homeowner was foreclosed on illegal they would be compensated for. It is a mess for sure and the homeowners did not create this mess at all. The banks and lenders need to step up and take ownership for their mistakes.

November 26 2010 at 9:52 PM Report abuse +1 rate up rate down Reply

Bofa and countrywide screwed up,so why should we have to continue making payments into something that probably don't exist,our homes should now be free and clear,not our fault!

November 25 2010 at 11:26 PM Report abuse rate up rate down Reply
1 reply to dairymn2's comment

Unbelievable how many times I’ve heard this same argument. Free houses for everyone! Those big bad banks messed up on the paperwork so all of us should party! These banks may have screwed this up, and possibly on a wide scale. But not paying on a note that a borrower has signed is stealing, no question about it. The money for your house came from investors, many of which are average folks through their pension plans and 401ks. The banks just service most of these loans for the investors. When you don’t make payments on the note, that money never gets paid to the investor – could be anyone you know who will have less retirement money because of greed.

November 28 2010 at 7:29 PM Report abuse -1 rate up rate down Reply
1 reply to Jeff's comment

Is it not exactly what the banks are doing? Stealing? Jeff, you either work for a bank, are a banker your plain $+up!|).

July 11 2014 at 4:12 PM Report abuse rate up rate down

People put their money, faith and trust in banks and yet some of the banks continue to lie about problems they know they have and won't fess up to the problems until forced to do so. Personally...let them go under and do not bail them out! The banks that are run in a fiscally responsible manner should grow through new customer acquisition and the banks that "lie and hide" their problems should be held accountable and if necessary forced to liquidate. Most of these banks are nothing more than a license to steal. It is time to stop the greed!

November 24 2010 at 8:49 PM Report abuse +2 rate up rate down Reply