After last week’s column
here glossed over issues surrounding whether mortgage notes were properly transferred into trusts, and suggested that a good argument existed for the validity of securitization trusts based on input from sources I spoke with and quoted, Naked Capitalism’s Yves Smith posted a dismissive retort
that characterized my entire column “misleading” and “erroneous.”
I’m not interested in changing Smith’s mind. But I do feel pretty strongly that the issues surrounding securitization trust validity need to be discussed in the widest possible public forum, so this week I’ll do a bit more than simply gloss.
Before I get into the weeds, I want to note that what I’m presenting today are my own views developed over the course of weeks of research, reading available cases, speaking with attorneys and other experts on both sides of this debate (including trust attorneys in New York, attorneys specializing in foreclosure defense, creditor’s rights specialists, trial lawyers), as well as others.
I also want to note—as should be understood with any non-attorney attempting to make sense of law—that what I’m writing here represents my thoughts at this particular point in time. I would hardly characterize these thoughts a final or definitive point in my own thought process, let alone on any particular issue I address.
With that as background, let’s get to it.
New York trust law, and the importance of intent
Naked Capitalism’s Smith claims in her retort and in practically every other post she’s written on this matter that securitization trusts are governed by New York trust law, which she characterizes variously as “well settled” and “unforgiving”—but despite making these claims, and as best as I can tell, she has thus far failed to provide any analysis of this critical body of law.
Given that, let’s start with a look at what the law in New York state actually says. It turns out that in New York common law, a single case, Brown v Spohr (1904), has become axiomatic in establishing the essential elements of a valid trust. Those elements, very specifically and verbatim
1) A designated beneficiary;
2) A designated trustee, who must not be the beneficiary;
3) A fund or other property sufficiently designated or identified to enable title thereto to pass to the trustee; and
4) The actual delivery of the fund or other property, or of a legal assignment thereof to the trustee, with the intention of passing legal title thereto to him as trustee.
Here, I want to zero in on the fourth element of a valid trust, as it is the most relevant. In particular, notice that “actual delivery” of the asset to the trust is not the sole method by which one can convey an asset into trust; a “legal assignment” to the trustee is considered equivalent to and, on the basis of this language, indistinguishable from actual delivery for the purposes of establishing the validity of, and conveyance into, a trust.
Regardless of whether via actual delivery or legal assignment, New York trust law also recognizes the foundational importance of “the intention
of passing legal title” (emphasis mine) to the trustee. The language used clearly does not require “the act
of passing of legal title” in order for a valid trust to exist, or for conveyance; nor should passing legal title to property be confused with either delivery or legal assignment of the same.
So, to recap the above discussion: valid conveyance = actual delivery + intent to transfer title = legal assignment + intent to transfer title.
Most importantly for this discussion, intent is a sufficient condition for trust formation and conveyance into trust, so long as some instrument exists to effect a “legal assignment” to the trustee. That instrument? The Pooling and Servicing Agreement.
Controlling law and context
I’ve come to learn that there are numerous areas of applicable law relative to mortgage securitizations:
- Trust formation/creation/conveyance: New York trust law;
- Business trust administration, rights and duties of parties to the trust: Contract law, as per the governing contract document(s), in this case the Pooling and Servicing Agreement;
- Enforcement of rights involving trust assets: For the note, if negotiable, UCC Section 3, and if non-negotiable, UCC Section 9; for the mortgage/deed of trust, applicable state-level real estate law.
The sources I’ve spoken with have repeatedly told me that one of the most fundamental aspects of the practice of law is that the correct controlling doctrine of law be invoked and applied within its appropriate context, and I’ve also been told this is something judges are commonly called upon to do when rendering any opinion—especially in trial courts, where attorneys often as a matter of tactic will attempt to introduce any and all evidence the court will deem permissible under any potentially applicable doctrine of law (this is because any subsequent appeal must entail only evidence admitted at the original trial).
Within this context, the PSA is best interpreted as an instrument designed to evidence the “legal assignment” element required under New York law. The language in every single PSA I’ve ever seen seems readily clear to me on this point.
To wit, from the same Argent/Ameriquest PSA I cited in last week’s column
The Depositor, concurrently with the execution and delivery hereof, does hereby transfer, assign, set over and otherwise convey to the Trustee without recourse for the benefit of the Certificateholders all the right, title and interest of the Depositor, including any security interest therein for the benefit of the Depositor, in and to the Mortgage Loans identified on the Mortgage Loan Schedule, the rights of the Depositor under the Mortgage Loan Purchase Agreement, all other assets included or to be included in REMIC I and the Cap Contracts. Such assignment includes all interest and principal received by the Depositor or the Master Servicer on or with respect to the Mortgage Loans (other than payments of principal and interest due on such Mortgage Loans on or before the Cut-off Date). [emphasis added]
Notice what’s missing from the language above—no “hereby conditionally assigns,” no “hereby assigns, subject to additional requirements as stipulated in Section X,” nothing that would otherwise look to add any strings or caveats whatsoever to the legal assignment. The PSA’s unambiguous contract terms, in no uncertain manner and in language as crystal clear as legal language ever will get, are clearly designed to effectuate a “legal assignment” as required under New York trust law.
As Naked Capitalism’s Smith has repeatedly highlighted for what I believe to be the wrong reasons, PSA contracts also stipulate additional, separate contractual terms surrounding transfers of the physical notes and mortgages to the trust “in connection with such transfer and assignment,” as well as stipulating timeframes for these transfers to take place as well—but at no time has any PSA I’m aware of ever stipulated that these additional terms of transfer are intended to create a contingency upon the prior legal assignment. (In other words, saying “in connection with” is very different from saying “as a condition to.”)
Yet despite this fact, Smith and her sources would apparently have us believe that such a contingency on this assignment does somehow exist, and that a failure to follow the PSA’s additional terms for transfer of title to the note and mortgage—if, indeed, there was such a wholesale failure to do so in the first place—somehow also represent prima facie
a failure to convey assets into trust.
Beyond the fact that there is no basis in contract law for such a claim (the PSA contract would have to clearly state such terms), there is also absolutely no basis in NY trust law for such a claim (because, as illustrated earlier, NY trust law does not require the actual transfer of title as a condition of a valid trust; the intent
to transfer the same is sufficient).
If my interpretation is correct, then, and if there is somehow a failure to transfer the note and/or mortgage per the PSA terms, the trust still would clearly own the obligations that were legally assigned to it via the PSA.
Understanding the role of transfer of title and the UCC
I can almost hear the question coming next: But wait, what about the Uniform Commercial Code? Doesn’t that apply here? Again, as in the previous section, and as I understand it, the ultimate issue at hand in interpreting the law lies in determining which body of law controls within any particular given context.
I would argue that the provisions of the New York UCC (either section 3 or section 9, depending on the negotiability of the instrument) absolutely do
apply to securitization trusts governed by New York laws, but not for the purpose of conveying assets into a trust; instead, the additional contract terms within the PSA that stipulate transfer requirements for the note and mortgage exist to conform with UCC provisions, and provide the roadmap needed for all parties to the PSA contract make good on their intent
to transfer title to the trust.
In fact, interpreted in this view, the transfer provisions and related aspects of the PSA contract are evidence on their very face of the intent
that is required of any valid trust under New York law.
The trust is therefore already well established and owns the obligations in question, while the UCC provisions, in turn, govern the right to enforce legal rights upon a default by the borrower. And as I will explain below, a recent and highly publicized bankruptcy court ruling out of New Jersey made precisely
this same distinction.
The Kemp decision, a.k.a. where is the Power of Attorney?
I want to again highlight a New Jersey bankruptcy case I referenced in last week’s column
, Kemp v. Countrywide, to drive home the point this column has been attempting to make from the outset: There is a difference between a trust owning an obligation, versus having the ability to enforce it.
If you’ll recall, in the Kemp case, a witness for Countrywide testified at trial that it was common practice for the lender to retain possession of the note. That’s what started this entire debate, with commentators seizing upon the testimony to claim that Countrywide never conveyed the mortgage loans it originated into trust, and therefore the trust did not own the obligation.
BofA has since disavowed this testimony on the grounds that the witness was not qualified to opine on document transfer procedures, and attested that it was/is Countrywide’s common practice to transfer the notes; but for the sake of illustrating the point, let’s hypothetically assume for a minute that the testimony given was accurate.
One of my sources noted last week that if an attorney-in-fact held possession of a note indorsed in blank, it’s the same thing as the trust holding the same. Naked Capitalism’s Smith derided this view:
Huh? The servicer is not the attorney-in-fact for the trust in Kemp. If they were, the attorney for BofA would certainly have tried this argument. In fact (hah!), the judge notes the plain language of the PSA, that the loan was supposed to be delivered to the trustee, and all parties agree in the case that this requirement was not met. Does this attorney know ANYTHING about securitization?
I won’t ask Smith a similar question about her knowledge of servicing practices, as I should have explained my source’s remark more clearly. Every servicer I have ever seen in a private-market deal has a limited Power of Attorney that grants them the ability to act as attorney-in-fact for the trust they are a named servicer for. And it’s my understanding that an attorney-in-fact for the trust holding on to assets owned by the trust constitutes “actual possession” to the trustee itself.
What this means is that the real import of the Kemp case isn’t the overwhelming preponderance of evidence in favor of the borrower, who conceded to being in default in this case; instead, it’s the missing Power of Attorney.
Assuming the POA exists, and the servicer can actually find it, the Kemp opinion does not show it was introduced and does not show that the argument was ever made to the court. Had this evidence been presented and the argument made, not only could the opinion could have been very different, but grounds for appealing an adverse ruling would have at least been established.
Naked Capitalism’s Smith clearly believes that if the power of attorney existed in the Kemp case, it would have been introduced; I tend to believe, however, that what gets introduced as evidence at a trial is as much about the existence of that evidence as it is about the tactics chosen to try the case. The defense in this case took the approach that the mortgage assignment alone was sufficient to carry the day. That approach, as it turns out, was incorrect.
So, despite a failure to evidence valid possession of the note by the trustee prior to filing its proof of claim (as well as an attendant failure to properly indorse the note per UCC provisions, prior to filing of the same), the Kemp opinion makes it clear that the trust still owns the obligation. It just can't enforce it, per the plain language
of the judge's opinion:
Accordingly, the Bank of New York [as trustee] has a valid claim of ownership, but may not enforce the note on the basis of the reference to the note in the recorded assignment of the mortgage.
As I’ve sought to research and understand the issues at play in the debate over securitization trust validity, I’ve gained some interesting new perspective, as well.
It’s very clear to me that the servicing industry tends to prefer what’s known as a limited defense strategy in most litigation, versus employing more robust defenses to some of the claims it now faces. And while that approach entails some very real risks that are now becoming pretty clear, it’s an approach designed to minimize losses to the trust, so I’m not sure that I see that approach changing anytime soon.
It’s equally clear to me that what ultimately matters aren’t these “angels on the head of a pin” sort of legal issues, although I think some commentators have been confused into thinking that is the case. The real bottom line is this: our nation’s banks clearly aren’t any better at servicing, mitigating losses, and even foreclosing than they were at underwriting these damn loans in the first place.
You don’t have to look very far to understand that reality. Just watch the local news and you’ll see stories about the latest person to get a notice of default despite being current on their mortgage, or learn about a woman that had to cower in her bathroom when a work crew showed up to re-key the wrong house.
I don’t begrudge Yves Smith for holding her own viewpoints—and, frankly, nobody ever really knows with any certainty how a judge is going to rule on any particular case. She, and those that share her views, might yet win the support of the judiciary. Or perhaps the view I’ve outlined here, or some variant upon it, will win out. Or, probably more likely than not, there will be trial court rulings all over the place for years until appellate rulings finally begin to bring more clarity to this subject.
By then, however, I suspect we’ll all have forgotten what was supposed to have mattered about being right in the first place.
Paul Jackson is the editor of HousingWire.com and HousingWire Magazine. Follow him on Twitter: @pjackson