KA-BOOM! INVESTORS FILE SUIT: Bank of America, Countrywide and named executives committed “MASSIVE” SECURITIES FRAUD related to Mortgage-backed Securities

In the debate over whether the mortgage-backed securities of recent years “taste great,” or are “less filling,” it appears that institutional investors and some of the world’s largest insurance companies are now saying that they’re less filling… as in Countrywide and Bank of America neglected to include the mortgage-backed part, and instead sold them empty “securities.”

Uh oh!  Did you hear that?  That was the sound of a shot being fired… a shot, one might say, most definitely heard round the world… possibly followed by the sounds of Angelo Mozilo screaming in agony… and finishing up with the loudest flushing sound that mankind has ever heard.  Ladies and Gentlemen, please take your seats… our play is about to begin…

I just want to make sure that everyone is with us before our curtain is raised… Max Gardner, are you here?

“Yes, Martin, I’m right here.”

Great, Max… good to see you… I’ve saved you a seat right down in front… if you’ll just follow me… there you go.  April Charney of Jacksonville Legal Aid, are you here?

“Right here, Martin.”

Perfect… wouldn’t want to begin without you in the audience.  If you could just sit right down in front next to Max… that’s it… wait a moment… April… what’s that in your purse?  Give those to me… I told you, no tomatoes at tonight’s performance.  There’ll be plenty of time for throwing things at Mozilo and his cohorts in the months to come, I’m quite sure of that.

What was that sound… Max… I’m surprised at you… give me the kazoo and the Whoopee cushion… there’ll be no kazoos or other sound effects during tonight’s performance either.  Don’t worry, the gloating lamp will be lit immediately following the show, and you can do all the gloating you’d like at that time.

Let’s see… A-list bloggers, are you all with us?  Naked Capitalism, where are you?

“Yves here.”

Ah, yes… Yves Smith… you’re in row two… and may I say, you look lovely this evening… Gretchen Morgenson?  Wonderful to meet you… just slide in right next to Yves.  And where’s my rock star, Matt Tiabbi of Rolling Stone?

“Hey, what the f#@k is that supposed to mean?”

Just kidding, Matt… if you could just slide in down that row as well… thanks.  Danny Schechter, The News Dissector… right next to Matt… perfect.

Oh, look who’s here… Elizabeth Warren, I’m so pleased you were able to join us… let’s see where I’ve got you sitting…

“Um, she can sit next to me…”

Oh, Simon Johnson, of course… sorry, but I have you over here.  Ms. Warren, you’ll be over by me instead…

“But… I was Chief Economist… ”

I know you were, Simon, but I’ve got you sitting with James Kwak…

“Oh come on… I’m always stuck sitting with him… this is so not fair…”

Look, Simon… stage a quiet coup, would you please?  Thank you…

And Shahien-Nasiripour… there you are… I’ve got you with Shame-the-Bank’s Richard Zombeck since you’re both with HuffPo, good with you?  Great.  And Steve Dibert of MFI-Miami, you’re next to Richard.

Adam Levitin?  Where the heck is Adam… oh, I see you… go ahead and slide in to Liz Warren’s left… and Jan Tavakoli and Max Kaiser?  Hi… same row, just the next seats down.

And let’s see, where are the rest of my authors.. Michael Hudson, author of “The Monster,” Michael Lewis of “The Big Short,” Andrew Ross Sorkin of “Too Big to Fail,” and Robert Reich of “Aftershock,” perfect… all here.

Oh, Dr. Krugman, “Depression Economics,” yes, I know… sorry, you’re right here.  And Bethany McLean of “All the Devils are Here.”  Where’s Joe Nocera?  Oh, whoops… didn’t see you back there… you two are together…

Now, we’ve really got to get the show started… where are the rest of my bloggers… Foreclosure Hamlet, Foreclosure Blues, 4closure Fraud, Firedog Lake… glad to see you could all make it, not that there was ever any doubt that you would.  Calculated Risk, Zero Hedge, Mish Shedlock, Dr. Housing Bubble, Housing Doom, and what about Moe Bedard of LoanSafe?

“I think he’s driving over with Bruce Marks of NACA.”

Oh, hi… Aaron of ML-Implode… how are you… okay, well hopefully they’ll get here soon.  Has anyone heard from Mr. Mortgage?

Look… I’m terribly sorry to all of those that I couldn’t seat personally… oh, wait… it’s Matt Weidner, Glenn Russell, Tom Cox, Walter Hackett, and I see you brought a whole team of foreclosure defense attorneys with you… that’s wonderful… just fill in wherever you find seats, the curtain is about to rise…

Ladies and gentlemen… it’s time for the premier of… ring, ring… oh, that’s my cell, I’m sorry, let me just see who this is…

Hello?  What’s that?  The Treasury Secretary wants to… which one?  No, tell Secretary Geithner and ex-Secretary Paulson that there’s no room this evening, they’ll just have to attend the performance some other time.  And who?  No, Greenspan and Bernanke either… nope… that’s all… thanks, bye.

Sorry, about that… it looks like everyone wants to get in on this performance.  By the way, we’re still working on titles for tonight’s show.  The top contenders so far are:

Field of Schemes – If you steal it, they will come.

The Gotshanked Redemption

Swindler’s List

The Sound of REMIC

2010: A Loan Modyssey

The Signing

Whack to the Future

Cocky

Slumlord Billionaire

Securitized Dogs

Dances With Facts

Greased

The Lying King

Feel free to jump in anytime…

And now… with no further adieu… ACT II, Scene I…

Investors file suit alleging massive securities fraud on the part of Countrywide, Bank of America, and a slew of Countrywide executives…

And, here’s the Mandelman rundown…

You’ll find the complaint in its entirety below, but it’s 194 pages long, and although I found it pretty easy to read, and even worth reading (if you like that sort of thing,), I also understand that not everybody wants or needs to read 194 pages that contains no gratuitous sex or senseless violence.  Besides… I’m sure many of my fellow bloggers and journalists are going to be producing intricate analyses of this case for sometime to come, so you’ll have plenty of time to add details.

Here’s how our story begins… from the complaint filed yesterday…

“This action concerns a massive fraud perpetrated by Defendant Countrywide Financial and certain of its officers and affiliates against the Plaintiffs, which are investors in mortgage-backed securities (“MBS”) issued by Countrywide’s subsidiaries.

The Plaintiffs are institutional investors that wanted conservative, low-risk investments and thus bought Countrywide MBS (the “Certificates”) that were represented to be backed by mortgages issued pursuant to specific underwriting guidelines and rated investment-grade (primarily AAA). In purchasing the Certificates, the Plaintiffs and their investment managers relied on term sheets, prospectuses and other materials prepared by and provided to them by the Defendants, which made representations about the Countrywide Defendants’ purportedly conservative mortgage underwriting standards, the appraisals of the mortgaged properties, the mortgages’ loan-to-value (“LTV”) ratios, and other facts that were material to Plaintiffs’ investment decisions.

Plaintiffs and their investment managers also relied on Defendants’ public statements concerning the Countrywide Defendants’ adherence to prudent underwriting guidelines and careful credit analysis.

These representations by Defendants were recklessly or knowingly false when made. In reality, Countrywide was an enterprise driven by only one purpose – to originate and securitize as many mortgage loans as possible into MBS to generate profits for the Countrywide Defendants, without regard to the investors that relied on the critical, false information provided to them with respect to the related Certificates.”

Pretty easy to follow.  You know the storyline by now, right?

Investors, including New York Life, TIAA-CREFF, a French banking subsidiary that I’ve never heard of, and other deep pockets, institutional investors, bought mortgage-backed securities, and were told they were safe, solid and secure, but instead they were, well… shoddy and shitty.

So, you might wonder why Bank of America is included as a defendant, as in shouldn’t BofA be getting sued by another set of investors… I mean, if we’re going to do these one at a time, we’re going to be here for a while.

I do have an idea to speed thing up, if anyone’s interested.  Just bring in some retired judges and set them up with folding card tables in courthouse hallways… then limit all arguments to say… 3 minutes.  The bankers shouldn’t mind that sort of process, in fact it may just make them feel right at home.  Okay, just a thought…

Here’s why Bank of America is a defendant, according to the complaint:

“At the time of Bank of America’s purchase of Countrywide, a Bank of America spokesperson publicly stated:  ‘We bought the company and all of its assets and liabilities . . . . We are aware of the claims and potential claims against the company and have factored these into the purchase.’  Bank of America is a successor-in-interest to the Countrywide Defendants and is thus vicariously liable for the conduct of the Countrywide.”

See, why statements made to the press are so dangerous?  This is going to be the easiest case for Jon Stewart to make fun of ever.

So, Countrywide was underwriting loans, they were just have anyone sign anything and then taking out the trash “securitization style.”  It’s actually nice work of you can get it… and you don’t mind defrauding retired teachers and breaking the global financial markets for say 40 years.

But, that’s not close to what Mozilo and his Countrywide Gang told investors, no it’s certainly not…

According to the complaint:

“Despite taking on new risks to participate in the non-GSE mortgage-backed securities market, Countrywide continued to extol its underwriting standards, conveying to Plaintiffs and other interested parties that it was a successful, trustworthy company characterized by high professional standards. Countrywide’s Annual Reports for 2005, 2006, and 2007 stated that the company “established standards for the determination of acceptable credit risks” and that it “managed credit risk through credit policy, underwriting, quality control and surveillance activities.”

“The Annual Reports also promoted Countrywide’s “proprietary underwriting systems . . . that improve the consistency of underwriting standards, assess collateral adequacy and help prevent fraud.”  In its 2005 10-K, for example, which was filed in March 2006, Countrywide stated that “[w]e ensure our ongoing access to the secondary mortgage market by consistently producing quality mortgages . . . . We are focused on ensuring the quality of our mortgage loan production . . .”

Yep, they gilded the lily all right… But wait, there’s more… a lot more…

Countrywide claimed that its disciplined underwriting standards not only distinguished it from other lenders in the industry, but reflected enviable best practices. For example, in a Fixed Income Investor Forum hosted by Countrywide in September 2006, Mozilo explained that Countrywide led the industry in responsible lending:

“As an industry leader we served as a role model to others in terms of responsible lending. We take seriously the role of a responsible lender for all of our constituencies . . . . To help protect our bond-holder customers, we engage in prudent underwriting guidelines.”

Now, that’s not entirely untrue… I think they may just have been the role model for the industry, but we won’t know that for sure until the rest of the investors from all over the world get their massive fraud complaints ready to file… give it a month and they’ll be popping like popcorn, would be my guess, anyway.

Now, the complaint spend a significant amount of time explaining the securitization process, so if you haven’t already ready my articles on securitization and how it all works, here are three links worth checking out…

Securitization – How Our Society Changed When We Learned to Turn Lead into Gold

THE SIGNING – Or, Pardon Me, Mr. Banker But Your REMIC is Showing

Mandelman U.  Securitization and Mortgage-backed Securities

Okay, so if that was all there was to this suit, well, it wouldn’t be nearly as exciting as it is, because it would only be about buy-backs of loans, and we’ve all seen that going on already.  This suit, however, alleges quite a bit more.

D.  Defendants Materially Misrepresented Countrywide’s Transfer Of Good Title To The Mortgage Loans To The Issuing Trusts

In sum or substance, Defendants stated in each Prospectus Supplement that:

In addition, each of the sellers will represent and warrant that, prior to the sale of the related mortgage loans to the depositor, the applicable seller had good title to the mortgage loans sold by it. . . . Under the pooling and servicing agreement, the depositor will assign all its right, title and interest in the representations, warranties and covenants (including the sellers’ repurchase or substitution obligation) to the trustee for the benefit of the certificate holders.

These representations were false because, as alleged in detail in ¶¶ 146-157,

Defendants routinely failed to physically deliver the original promissory notes and security instruments for the mortgage loans to the issuing trusts, as required by applicable state laws and the PSAs.  These representations were also false because Defendants routinely failed to execute valid endorsements of the documents at the time of the purported transfer, as also required by applicable state laws and the PSAs.  The issuing trusts therefore did not possess good title to many of the mortgage loans and lacked legal authority to enforce many of the mortgage loans against the borrowers in case of default.

Hang on… stop right there… what was that last sentence?

“The issuing trusts therefore did not possess good title to many of the mortgage loans and lacked legal authority to enforce many of the mortgage loans against the borrowers in case of default.”

Is that right?  They lacked legal authority to enforce in case of default?  And whose saying this… New York Life and TIAA-CREFF, to name but two of the investors?  Well, I’ll be a monkey’s uncle.  Will wonders never cease?  Just when I had thought I’d already heard everything…

I wonder if homeowners fighting foreclosure will soon be bringing in investors to testify on their behalf against the servicer or trustee trying to foreclose.

And the compliant continues…

The Offering Documents for each offering of the Certificates represented in substance that the issuing trust for that offering had obtained good title to the mortgage loans comprising the pool for the offering.

In reality, however, Countrywide routinely failed to comply with the requirements of applicable state laws and the PSAs for valid transfers of the notes and security instruments to the issuing trusts.

In Kemp .v. Countrywide Home Loans, Inc., Bkrtcy. No. 08-18700 (D.N.J.), Countrywide sought to prove that the Bank of New York, as trustee for an RMBS issuing trust that purportedly held Mr. Kemp’s mortgage, was entitled to enforce the mortgage. Countrywide presented testimony by Linda DeMartini, who had been employed by Countrywide Servicing for almost ten years as of August 2009 and was then a supervisor and operational team leader for the Litigation Management Department of Countrywide Servicing.

Ms. DeMartini testified that, in her extensive career in the mortgage loan servicing business of Countrywide, “I had to know about everything . . . .” She testified that Countrywide Home originated Kemp’s loan in 2006 and transferred it to the Bank of New York as trustee for the issuing trust, but that Countrywide Servicing retained the original note in its own possession and never delivered it to the Bank of New York because Countrywide Servicing was the servicer for the loan.

And checkout what it says about the Pooling and Servicing Agreements and the assignments…

Countrywide Failed To Ensure That Title To The Underlying Loans Was Effectively Transferred

The rules for these transfers are governed by the law of the state where the property is located, by the terms of the pooling and servicing agreement (“PSA”) for each securitization, and by the law governing the issuing trust (with respect to matters of trust law). Generally, state laws and the PSAs require the promissory note and security instrument to be transferred by indorsement, in the same way that a check can be transferred by indorsement, or by sale. In addition, state laws generally require that the trustee have physical possession of the original, manually signed note in order for the loan to be enforceable by the trustee against the borrower in case of default.

In order to preserve the bankruptcy-remote status of the issuing trusts in RMBS transactions, the notes and security instruments are generally not transferred directly from the mortgage loan originator to the trust. Rather, the notes and security instruments are generally initially transferred from the originator (e.g., Countrywide Home) to the depositor (e.g., CWALT), either directly or via one or more special-purpose entities established by Countrywide Financial. After this initial transfer to the depositor, the depositor transfers the notes and security interests to the issuing trust for the particular securitization. Each of these transfers must be valid under applicable state law in order for the trust to have good title to the mortgage loans.

In addition, the PSA generally requires the transfers of the mortgage loans to the trust to be completed within a strict time limit after formation of the trust in order to ensure that the trust qualifies as a tax-free real estate mortgage investment conduit (“REMIC”).

The applicable state trust law generally requires strict compliance with the trust documents, including the PSA, so that failure to comply strictly with the timeliness, indorsement, physical delivery, and other requirements of the PSA with respect to the transfers of the notes and security instruments means that the transfers would be void and the trust would not have good title to the mortgage loans.

Well, you get where this is headed right?  The investors are finally ganging up and going after the banks for not only selling them crappy mortgage-backed securities, they’re also going after them for NOT HAVING ASSIGNED THE LOANS TO THE TRUSTS…

… And at the same time… so too are homeowners… as in the Massachusetts Supreme Court Decision of a couple of weeks back.

So, if the investors that are supposed to own the loans that are supposed to be assigned to the trusts say the notes were never assigned to them, and therefore they say they don’t have the right to foreclose… how can the servicers keep foreclosing?  Maybe these loans are actually unsecured debt that can be discharged in bankruptcy.  Maybe there are going to be some homes free and clear after all… I’m not saying there will, but I’m sure not saying there won’t be at this point.

Oh, and one last thing… remember the whole “robo-signer” thing from last fall… when the banks said this whole thing was just some sort of technicality that they’d fix up and have all straightened out in a few weeks… remember that?  So, let me guess… this is just an isolated incident, right?

It just makes you feel all warm inside, doesn’t it?  Best day, I’ve had in a long time.  And just below, you’ll find the complaint in it’s entirety… have fun reading… wait until you see what it says about Option ARMS… and much, much more… I’ll try to do a follow-up story on that as well…


Ergo bibamus!

Mandelman out.


Life Insurance Companies v Countrywide – filed Jan 24 2011


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