Another shoe has dropped in the Bank of America (BAC)/Countrywide foreclosure case.
Following the news that Bank of America could be facing billions of dollars in losses because it allegedly held on to homeowners' notes instead of putting them in a securitization trust, a BofA spokesman has challenged the credibility of Linda DiMartini. She's the BofA Home Loan operational leader who testified that holding on to the notes was Countrywide's custom.
But the transcript of DiMartini's testimony has come out, and it reinforces the fear that BofA has a big problem. Sure, the bank makes a plausible argument that DiMartini didn't know enough to testifiy that Countrywide often didn't deliver the notes. A sliver of daylight remains for BofA, neatly captured in part by a spokesperson's comment to DailyFinance a couple of days ago:
"...The associate whose testimony was cited in the ruling was asked about a process outside her normal scope of responsibilities and in an entirely different department from where she worked. A review of her testimony shows she later clarified that she was not comfortable testifying about the circumstances under which original loan documents would move, or whether and to what extent they ever are moved. This would include the initial delivery of original loan documents to the trustee."
But Countrywide's alleged custom of holding on to the notes isn't DiMartini's only damaging testimony. And contrary to BofA's comment, the damaging nature of that testimony is due in part to "her normal scope of responsibilities" and which department she works in.
Countrywide had two separate divisions: one that originated loans and one that serviced them. DiMartini worked in the servicing department, and if the notes had been properly transferred into the securitization trust, that event would have happened before the notes reached DiMartini's department. The blog Naked Capitalism reported that the securitization contract in the Kemp case seems to require the trust to hold on to the notes, meaning the trust should not have handed them over to Countrywide's servicing division.
But that kind of contract breach wouldn't be that big a deal -- at least not compared to never giving the notes to the trust in first place. That kind of failure to deliver leads to a title-clouding nightmare scenario, that could overwhelm BofA's balance sheet and throw into question the ownership of millions of properties -- as laid out by the Congressional Oversight Panel.
And helpfully for BofA, DiMartini confirmed that she had "never been involved specifically with the originations of the...loans." When asked if the notes ever moved to follow the transfer of ownership, she said: "I can't say that they're never moved because...with this many millions of loans as we have I wouldn't presume to say that, but it is not customary for them to move." And when asked if she had personal knowledge of the circumstances under which notes would move, DiMartini said: "not specifically to what I would be comfortable testifying to, no."
So it appears BofA might be okay, because the witness can't definitively say that between originating and servicing the notes, they were never delivered as required. But appearances can be deceiving.
The Hole in BofA's Defense: No Endorsements or Allonges
Another part of DiMartini's testimony suggests that, even if Countrywide delivered the notes as required, Bank of America still has a big problem. The securitization agreement in the Kemp case, like most such agreements, required each loan's note to be endorsed multiple times -- that is, signed over from one owner of the note to another -- to guaranty that a bankruptcy court couldn't latch onto the notes if the bank sponsoring the securitization went under. Those endorsements make the mortgages "bankruptcy remote."
Under most securitization contracts, if the notes were never properly endorsed to the trust, then it doesn't matter whether they were delivered. In that case, BofA's defense that DiMartini didn't know what she was talking about -- when she said it was customary not to deliver the notes -- becomes irrelevant.
And even if delivery without the right endorsements somehow gave the trust ownership of the notes -- preventing them from reverting to BofA's balance sheet -- that lack of endorsements should still be grounds for investors to demand BofA buy the securities back and/or sue over the securities. That's because it was extremely important to investors that the mortgages were "bankruptcy remote."
So what about the endorsement of the notes? DiMartini testifies that, in the 10 years she worked for Countrywide's servicing department , she's "never seen an actual note that has an endorsement on the bottom." And she would have seen a lot of notes, being that she was involved in "every aspect of the servicing".
While that certainly sounds bad, it's not definitive. Endorsements can be done on an "allonge" -- a paper addendum attached to the actual note. But to effectively get the notes into the trust, that allonge must be endorsed as the note would have been: at the time the trust was formed. In the Kemp case, ihe trust was formed in 2006. And the allonge would need to have been attached by staple, glue or its equivalent -- paperclips don't cut it.
The underlying idea of that rule is that a debtor should be certain that those demanding payment on the note are entitled to demand payment. If an allonge could work without being attached, you could have one person holding the note and someone else holding an allonge -- with both parties trying to get paid.
For her part, DiMartini says "it would be more normal to have an allonge than an endorsement." But in the Kemp case it turns out no allonge existed until BofA created one specifically for that litigation -- something DiMartini readily admitted. And the Kemp note was not endorsed. So, delivered or not, it seems the trust never got the Kemp note in compliance with the securitization contract. (The judge ultimately believed the note was never delivered and ruled the trust never owned the note on that basis.)
No "Norm" in Allonges?
So is it possible that the Kemp case was an aberration, and that allonges were routinely created and affixed at the time of securitization? Not likely.
DiMartini testified that, even though the Kemp loan was sold to the Bank of New York as the trustee and was securitized, "there wasn't a need for an allonge prior to this case." She also testified the allonge was never affixed to the note, and never in possession of Bank of New York.
Litigants are not supposed to create allonges. According to Max Gardner, a consumer bankruptcy attorney not involved in the case:
"The incredible thing and extremely troubling thing is that she testified that the 'allonge' was prepared several weeks before the hearing 'because counsel called up and said we needed one.' She also said that the original allonge, after the court hearing, would have been placed back in the Countrywide loan file. This testimony among other things is evidence of a major fraud on the court and serious ethical violations by the attorneys for Countrywide BAC in this case."
Regarding BofA's use of allonges, DiMartini explained to the judge:
"I don't believe that [allonges are] always executed exactly when the transfer [of ownership] takes place. I believe that it oftentimes happens that it happens after the fact."
Judge: So there's no routine that requires internally, to your knowledge, that the allonge be executed in connection with the transfer of ownership?
DiMartini: "No, I don't think that there is a norm in that respect...but as a normal business practice with a normal loan, often times there really isn't a need for [an allonge] unless the loan is going to continually to be sold, and since this loan was --yes, it was transferred to Bank of New York as trustee as it was securitized, but it wasn't that another mortgage company had the loan and then we bought it from them. Like I mentioned, this was always done by Countrywide and we securitized it and we, you know, we sold it to them --"
Judge: I'm not asking whether it was necessary, I am asking whether there was an ordinary business practice to sign an allonge and the answer is no, there was not?
DiMartini: "I don't believe so."
But is the BofA argument about DiMartini being in servicing, and not originating, relevant? How does she know what allonges were done at the initial securitization? DiMartini notes that any file she deals with contains all the documents, because the documents are scanned into the database the minute the servicing department gets them. So if a file had an allonge, she would see it.
And if all the files she had handled in her decade at BofA contained notes with allonges, wouldn't she have testified to that experience?
When I talked with BofA spokesman Jerry Dubrowski, and pointedly asked him about the endorsement/allonge issue, he reiterated the bank's basic line. "Her testimony was incorrect," he said. "While we cannot change what she said, the fact is she was wrong and she was talking about things that she did not have direct knowledge of." And when I pointed out that DiMartini's testimony about endorsements and allonges were regarding things she did have direct knowledge of (at least to the extent I've laid out above), he simply replied, "that's all I can say."
Getting Definitive Answers
Getting to the truth of the situation, regardless of what DiMartini has said, should be straightforward. Either all those notes that BofA's servicer has are properly endorsed or they're not. All one needs to do is look.
And regarding the delivery issue, DiMartini testified BofA used FedEx even when moving the notes among its own departments, so those documents could be tracked. Because the notes are extremely valuable, such tracking makes sense. And if the notes were ever delivered to the Bank of New York and then re-transferred to BofA Servicing, as BofA would have us believe, there should be a paper trail.
Surely at least one of the 50 Attorneys General and/or at least one federal regulator will go check, won't they?
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