Beyond Robo-signing

Posted by kevin on May 30, 2011 under Foreclosure Blog | Comments are off for this article

New Jersey went through a Kabuki dance earlier this year on the robo-signing issue.  When it dragged out for an additional couple of months, Legal Aid and the Seton Hall Law Center tried to intervene on behalf of the consumer.   The intervention was opposed by the court appointed judiciary representative.  How bout that.  The courts were represented in this process, the banks were represented, but the consumer was not.  Although eventually a retired judge was appointed to review bank filings, the cynic in me believes that the outcome will be limited to the banks being required to do a better job in piecing together their affidavits, i.e. “spin” more effectively.  This was a major disappointment because systemic change will not be made.  In other words, cases will be fought out one by one with some lenders continuing to submit suspect documentation especially in uncontested cases.

Contrast that with what is going on across the Hudson.  In New York, AG Eric Schneiderman issued subpoenas to 4 bond insurance companies as part of his investigation of the securitization process.  Why is that important?  Well, in the securitization process, the sponsor (usually an investment firm) would purchase insurance (usually credit default swaps) to hedge against the possibility that borrowers would not repay their mortgages.  The insurers wrote swaps (and other forms of insurance) based on the representations made in prospectuses and pooling & servicing agreements that loans were properly underwritten and did not violate the law.  If the loan did not conform to the representations, then the trustee was required to bounce the loan back to the originator.   In a substantial amount of the securitizations written from late 2005 to 2007, a question exists whether the trustees did their due diligence because not many loans that eventually failed were bounced back to the originators, or it was alleged that the  loans were bounced back and the sponsor tried to collect on the insurance at the same time.

Insurance companies, such as Ambac and MBIA, which lost billions of dollars on the swaps and insurance they wrote, have performed extensive investigations of the trusts to determine the quality of loans that found their way into the trusts and the lack of due diligence on the part of trustees and servicers.  Insurers have brought lawsuits against certain trusts to recoup their losses

Schneiderman is piggybacking on their investigations to get the “goods” on the sponsors and the originators.  If the insurers cooperate, then Schneiderman is light years ahead in his investigation.  Then, perhaps, the real “bad guys” can be brought to justice.