Robo-signers and foreclosure mills perpetrating fraud on the courts. Bond investors questioning the contents of mortgage-backed security trusts. Challenges to banks' legal standing.
These problems, once viewed as isolated or inconsequential, have been conflated into a monster supposedly capable of paralyzing foreclosures and obscuring the rightful ownership of real estate nationwide.
Despite all the hollering, the fundamental question of which entity possesses the right to foreclose on a property should not be that complicated. Both industry representatives and many consumer legal advocates agree that the crucial documentation should be aggregated in the hands of trust document custodians and that it should be retrievable.
This assertion underlies a recent industry counteroffensive against accusations that it cannot justify foreclosures. If all the proper documents are truly socked away, servicers will still have to grapple with the cumbersome process of obtaining records and atoning for past filing irregularities. But they will be able to prove who owns what on a common-sense basis.
Even prominent consumer lawyers who fight foreclosures suspect widespread failure on such a fundamental issue is unlikely. But if the custodians — oftentimes, the nation's largest banks — do not possess thorough documentation, banks would have significantly more trouble on their hands. Given the furor over documentation, it now seems inevitable that this will be tested.
"I can't believe in my wildest dreams that they didn't do what they said they were going to do," said North Carolina consumer bankruptcy lawyer Max Gardner. "My assumption … is that the reason the foreclosure mills don't go to the custodians is, it takes too much time and it's very expensive. But I may be wrong."
Lawyers, custodian representatives and record-retrieval companies said the process for documenting the ownership of a mortgage in a trust is straightforward and replete with checks to catch errors.
When a trust is formed, it is standard for the pooling and servicing agreement to designate a custodian to keep track of its assets on behalf of the trust. The depositor — the last stop before the trust — is then obliged to turn over the physical note, mortgage and sundry documents, for which it gets a receipt from the custodian.
Next, the custodian must ensure that the records are complete and give the designated master servicer "compliance reports" when everything is in order or "exception reports" when something is not. After any gaps are filled, the custodian must issue another receipt, to the trustee, documenting the assets it possesses, then file everything away in both electronic and hard copies.
Mike Wileman, the president and chief executive of Orion Financial Group Inc., a Southlake, Texas, provider of mortgage-assignment, lien-release and document-retrieval services, described custodians as performing duties similar to a library's cataloguing and lending activities.
"If they know they need those documents the normal procedure would be for the custodian to notify the servicer or investor that the document is missing," he said.
According to industry sources, this process is solid, what SNR Denton lawyers Stephen Ornstein and Stephen Kudenholdt called, in a recent analysis, "the prevailing and nearly universally followed practice." In an interview, the capital markets lawyers, formerly of securitization giant Thacher Proffitt & Wood, said wholesale gaps in such documentation are implausible. Though some quibbling and additional documentation is natural in legal conflicts, they said, the foundations of servicers' claims are sound.
"Trustees and custodians are not in these transactions to issue securities: Their role is to perform a limited function for a specific fee, and they take their responsibilities extremely seriously," Kudenholdt said.
If the servicer ever needed to produce those documents — for example, in the case of a foreclosure in which the paperwork is not in order — it could. However, it would have to pay fees for retrieval, transit insurance, shipment and eventual refiling. This could potentially take months.
But not everyone agrees that the records in custodians' possession are likely to be so complete. A Moody's Investors Service analysis released last week suggested that, though the panic over documentation was overblown, key documents may have stayed with the originating lender in some cases.
And consumer legal experts, including Diane Thompson, a lawyer at the National Consumer Law Center, said the industry's reluctance to produce documents suggests the retrieval process is at best fraught.
Often, foreclosure attorneys will only come up with originals "when they're under threat of personal sanctions, or the judge is threatening to dismiss the foreclosure," she said. Though in most cases they eventually can produce at least an original note, "it is astonishing the lengths that I've seen lawyers and plaintiffs go to avoid producing the documents."
April Charney, a Jacksonville Area Legal Aid Inc. attorney, said she is far more skeptical about whether the custodial process has worked, recently vowing in a televised interview to eat the first complete set of records presented to her.
"The documents don't exist," she said, citing servicers' vehement opposition to her attempts to call in custodial staff for depositions in her cases.
SNR Denton's Ornstein dismissed such speculation.
"If there was a systematic problem with what custodians are doing, elemental breaches in their duties, we'd know about it by now," he said. "To the extent that people have questions about whether the notes were really delivered, it is provable they were. … We're surprised that we're talking about this issue at this juncture."
Even major gaps in custodial records, such as a missing original note, would not guarantee a victory for a borrower. Orion's Wileman noted that companies like his can use other methods to prove ownership, such as buy-sell agreements. But as Gardner and other consumer defense attorneys say, the concern over false affidavits and other foreclosure shortcuts may cause courts and others to require the higher quality documentation that a custodian should possess. Even if it's all there, producing it is anathema to the standard foreclosure operation.
"The big disincentive is the time it takes and a business model that's running on speed — on Dexedrine," Gardner said.
Therefore even the threat of slowing down the process may give borrowers leverage to challenge more substantive servicer misconduct like tacking false fees onto a debt or failing to offer borrowers a chance to negotiate, said Thompson of the consumer law center.
"When I was representing homeowners, not being able to find the note was not the result I ever wanted to get to," she said. "But linked to the whole question of do [servicers] have the right documents and have the right to foreclose is, 'Does my client really owe this money?' And those are questions any competent, ethical attorney should ask."
