By Michael T. Pines (michaelt.attyconsultant@gmail.com)
I am getting a lot of questions about Glaski and concern it may be depublished. It may not be as big a concern as you think. There is lots of other law out there.
Prior to the now infamous California case of Glaski v. Bank of America among foreclosure activists, a number of trial courts had held the banks liable on the same theory. Articles had been published on the topic. I worked with a class action firm in Texas and they already got a class action certified on this basis. It is definitely a trend, and only a matter of time before another published opinion is issued.
For those who may not be aware, Glaski is based on the “New York Trust Theory”.
Parties to securitization could operate only as stipulated in the pooling and servicing agreement that created that particular deal. Over 100 years of precedents in New York have produced well settled case law that deems actions outside what the trustee is specifically authorized to do as “void acts” having no legal force. The rigidity of New York trust law has serious implications for mortgage securitizations. The PSAs required that the notes (the borrower IOUs) be transferred to the trust in a very specific fashion (endorsed with wet ink signatures through a particular set of parties) before a cut-off date, which typically was no later than 90 days after the trust closing. There also had to be a recordation of assignments through a specific procedure. There is no legal way to remedy the problem after the fact. Here is the typical chain of transfers that was supposed to occur:
In their rush to securitize as many loans as possible (and greed, some estimate in the trillions of dollars), they didn’t do either the transfer of the Notes or assignments of the mortgage. The size of the RMBS market, according to the Bond Association, was in fact in the trillions of dollars and continued started to grow after 2005 (as discussed recently on stopforeclosurefraud.com, “Back In The Pool: Inside The RMBS Comeback”). Here are the numbers according to the Bond Association :
2005: USD 0.967 trillion
2004: USD 1.019 trillion
2003: USD 2.131 trillion
2002: USD 1.444 trillion
2001: USD 1.093 trillion
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A FEW OF THE PRIOR CASES ARE AS FOLLOWS.
The earliest court of appeal case I am aware of to discuss the New York trust theory, was in 2011. U.S. Bank v. Congress (Alabama Court of Appeals). Although it focused on the allonge, it was very significant and scary for the banks.
The solution in the Congress case for the banks, appears for the banks to have been a practice that has since become troublingly become common: a fabricated allonge. An allonge is an attachment to a note that is so firmly affixed that it can’t travel separately. The fact that a note was submitted to the court in the Congress case and an allonge that fixed all the problems appeared magically, on the eve of trial, looked highly suspect.
The case was ruled in favor of the US Bank, in a narrow and strained opinion (which was touted as significant by reliable securitization industry booster Paul Jackson). It argued that the case was an ejectment action (the final step to get the borrower out after the foreclosure was final). It was also discussed by securitization expert, Georgetown law professor Adam Levitin who tried to minimize it (maybe prompted by the banks or a Too Big To Fail Mentality?)
Here is the case:
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In Texas bankruptcy court in 2013, there was this decision:
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
BROWNSVILLE DIVISION
IN RE: GILBERTO SALDIVAR, SANDRA
CANALES SALDIVAR,
CASE NO: 11-10689
This case can be found on Pacer or I will send it on request. This seems to have caught on with bankruptcy attorneys in Texas, and is perhaps what led to the first class action, I am aware of being filed there.
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In New York in 2013, there was a decision in the trial court. Since the theory is based on N.Y. law, the court provided detail about the law in that state.
Wells Fargo v. Erobobo, 2013, New York Slip Op. 50675 OU.
In Texas bankruptcy court an order was issued 2013:
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
BROWNSVILLE DIVISION
IN RE: GILBERTO SALDIVAR, SANDRA
CANALES SALDIVAR,
CASE NO: 11-10689
This case can be found on Pacer or I will send it on request. This seems to have caught on with bankruptcy attorneys in Texas, and is perhaps what led to the first class action I am aware of on this theory being filed there.
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Also a good article had been written in the NY Business Law Journal | Summer 2012 | Vol. 16 | No. 1.
Advanced Standin g Issues in Securitized Mortgage Foreclosure
By Charles H. Wallshein
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YET ANOTHER CRISIS WAITING TO HAPPEN – COMMERCIAL LOANS HAVE THESE PROBLEMS TOO!
In 2012, the case of Bank of Am. Nat’l Ass’n v. Bassman FBT, 2012 Ill. App. LEXIS 487 (Ill. App. Ct. 2d Dist. 2012 was decided issued a ruling in a commercial mortgage foreclosure case. In my mind, this case was very significant because it applied to an area that hasn’t even been touched yet – securitization of commercial property loans which is another disaster waiting to happen. Many don’t recognize the many of the same problems with the securitization in the “RMBS” market exist in commercial securitization in the “CMBS” Market. In fact, few seem to know, they used MERS for commercial loans too. (This is an area I focus on in the Savings and Loan crisis).
Bank of Am. Nat’l Ass’n v. Bassman is mainly a choice of law opinion, but there are two interesting things about the case. First, the Illinois court very clearly understood the securitization fail standing argument made by the defendants and was taking it seriously. Second, the Illinois court applied New York law to the interpretation of the PSA.
But it gets worse.
THE REMICS HAVE ALSO FAILED WITH ENORMOUS TAX IMPLICATIONS.
As if this crisis wasn’t bad enough, and lastly, I want to mention another enormous problem because the REMICs fail also.
A REMIC (Real Estate Mortgage Investment Conduit) or special purpose vehicle (SPV) is an entity that is created for the specific purpose of being a tax free pass-through for interest income generated by pooled mortgages. This allowed investors to purchase shares or certificates in a mortgage pool that was only taxed once at the investor level. The REMIC rules allowed the mortgage pools to collect interest income from the pool and disburse that income the certificate holders tax free at the pool level. REMIC rules are very specific, and to qualify as a REMIC under federal and state tax codes, the SPV had to meet very stringent requirements. The REMICs also require a timely transfer of the Note and Mortgage within certain time limits of the closure of the securitized trust that didn’t occur. They are incorporated into the PSA.
If the IRS decided to go after the institutional investors for their tax liability, the numbers would be enormous. However, this would of course hurt “the 1%”, but would improve the deficit, the the economy, and us. Given the “Too Big To Fail” approach of the government, and the fact there is little distinction between the government and the financial institutions, don’t hold your breath.
This article is for informational purposes only. It is not legal advice. You should seek counsel from a licensed attorney if you have legal questions.