Of far bigger importance is the possibility that the trustees for the mortgage-backed securities they created never secured the assets from the originators. If the notes never transferred to the trust, there’s no way to retroactively do that now; the trusts are governed by very specific pooling at servicing agreements that for the most part give the trust 90 days to transfer all the required assets. You cannot transfer the loan after it’s slipped into default, 3 or 4 years after setting up the trust. It violates the laws and contracts under which the investors purchased the securities.
Now we have documented evidence, beyond anecdote, that Countrywide, one of the largest subprime lenders, which securitized almost all of the loans they made, never sent the notes to the trust. In a deposition provided to a US Bankruptcy Court in the District of New Jersey, Linda DeMartini, a supervisor for Bank of America Home Loans (BofA bought Countrywide in 2008), admitted that the original notes never transferred from Countrywide into the trusts.
In other words, when Coutnrywide turned its mortgages into securitized cole slaw, they never turned in the paperwork. Anything after that 90 period means that whatever Countrywide did afterward is legally null and void, including trying to foreclose.
This is a deposition from one supervisor, but it could mean that all mortgage pools that Countrywide sold are suspect. That would amount to perhaps hundreds of billions of dollars in MBS. And the law appears to be air-tight on this, and not governed by the Constitution but New York trust law and the specifics of the pooling and servicing agreement.
Now, tell me again how the banks are planning to get out of this.
They're not. They're screwed and they know it. That's why they are trying to do everything they can to buy Congress off to retroactively make everything they did legal after the fact.
We can't let that happen. More on this from Yves Smith:
This is significant for two reasons: first, it points to pattern and practice, and not a mere isolated lapse. Second, Countrywide, the largest subprime originator, reported in SEC filings that it securitized 96% of the loans it originated. So this activity cannot be defended by arguing that Countrywide retained notes because it was not on-selling them; the overwhelming majority of its mortgage notes clearly were intended to go to RMBS trusts, but it appears industry participants came to see it as too much bother to adhere to the commitments in their contracts.
Banks are potentially on the hook for trillions of dollars in putbacks, folks. Bye bye, banks. Bye bye, economy.