newjerseynewsroom.com

Decision could have multi-billion-dollar implications

BY JOE TYRRELL

NEWJERSEYNEWSROOM.COM

The mishandling of mortgage records has thwarted another attempted foreclosure in New Jersey, and this time the case has multi-billion-dollar implications for a major lender.

In U.S. Bankruptcy Court in Camden, Chief Judge Judith Wizmer rejected an attempt by failed lender Countrywide Home Loans, now a part of Bank of America, to foreclose on a Haddon Heights property.

The problem, as Wizmer pointed out in her opinion, is that Countrywide, one of the firms at the center of the subprime mortgage scandal, represented that it had sold the mortgage to the Bank of New York and was acting as the loan servicer.

But Countrywide never gave Bank of New York the original document or an allonge, an attachment for endorsing the transaction, the judge said.

During the proceedings, bank representatives told the judge that was common practice before Countrywide, on the verge of going under, was absorbed by Bank of America in 2008. But failure to pass along documentation of transactions violates laws in New Jersey and across the nation. Without a chain of possession and endorsements real ownership of notes becomes clouded.

"The fact that the owner of the note, the Bank of New York, never had possession of the note, is fatal to the enforcement," Wizmer wrote.

Countywide was the number one issuer of shaky "subprime" mortgages during the housing bubble. It resold many to investment banks, where they were repackaged as securities and marketed as safe investments right up to the collapse of the market. Countrywide securitized an estimated 96 percent of its loans, so if it routinely failed to transfer documents, Bank of America could be liable for billions in inherited bad loans.

The New Jersey case arose from a simple demand by borrower John T. Kemp, who had taken out mortgages on several properties, including one on Kings Highway in Haddon Heights in 2006. Like many property investors, Kemp quickly ran into trouble when the market collapsed and filed for bankruptcy.

As part of that proceeding, his attorney, Bruce Levitt, filed a five-year repayment plan, subsequently shortened to 54 months. When the bank tried to foreclose, Kemp sued, saying it had not produced the required documentation.

In what the judge politely described as "a bizarre twist," Countrywide submitted a certificate stating the original loan note had been lost so the allonge could not be attached, but at almost the same time told the court that it had the note. In the wake of the discrepancy, the bank "asked the court that the Lost Note Certificate be disregarded," Wizmer said.

A top official in Bank of America's litigation management department, Linda DeMartini, testified that Countrywide followed its normal practices in handling the Kemp mortgages. DeMartini told the court it was "customary for Countrywide to maintain possession of the original note and related documents," Wizmer wrote.

In subsequent statements to the New York Times and other media, a spokesman for the bank claimed DeMartini had "clarified" that comment in subsequent testimony, and that Countrywide did not routinely keep possession of mortgage documents after their sale.

But an excerpt from the transcript shows one of the bank's attorneys, Harold Kaplan, supported DeMartini's version in an exchange with the judge. Wizmer pointed out that New Jersey's Uniform Commercial Code and the master loan servicing agreement both require physical transfers of documents.

The attorney replied that "although your honor is right... 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."

Under the law, the banks had several ways to pursue the Kemp foreclosure, according to Wizmer. But the set of facts that they presented, that Countryside was only the loan servicer for the Bank of America but still had the actual mortgage, does not fit any of the legal methods, the judge said.

A state Superior Court judge in Atlantic City made a similar point in July, blocking the Bank of New York from taking a Brigantine house because of a lack of documentation after its subsequent securitization of the underlying mortgage. Other rulings have happened in state courts around the nation.

In the course of inflating the housing bubble prior to the recent financial collapse, lenders increased their housing loans and often dramatically reduced downpayments. They steered more borrowers into high-cost "subprime loans," even some who qualified for better rates. That practice gave the appearance of increasing the banks' returns, but meant the loans were riskier than normal mortgages.

Lenders often sold these loans to investment banks that packaged them into securities, collateralized debt obligations, and marketed them to investors, including major pension funds. Although the underlying mortgages were often shaky, loan rating agencies — which are paid by the sellers of securities — most frequently gave the issuers their top ratings, giving investors the false impression that they were safe.

In the wake of the Wall Street bailout, there have been enforcement gestures. In October, Angelo Mozilo, Countrywide's former chief executive officer, agreed to a $67.5 million settlement after the Securities and Exchange Commission charged that he and two other former executives misled investors by overrating the credit strength of borrowers of their subprime mortgages.

While the SEC touted the deal as a record penalty, it is unclear if it actually required Mozilo to pay anything. Bank of America was contractually required to pick up most of Mozilo's fine, and insurance paid at least some of the remainder.

That total was roughly half the profit Mozilo made by selling off his Countrywide stock in 2006 and 2007, shortly before it tanked.

As Wizmer was writing her opinion, Ambor Financial Group announced it is suing a number of trusts, including many established by Countrywide, claiming they misrepresented their securities at time of sale.

Even the mortgage rating agencies that enabled debt issuers to scam investors have gotten tougher now that the damage is done. On Nov. 23, Moody's Investors Service announced that it has downgraded another $19.1 billion in Countrywide securities. Moody's now rates many Countrywide securities at C, below junk grade, contrasting to the original AAA ratings.

Joe Tyrrell may be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it