NY AG Unsheathes Excalibur

NY AG Eric Schneiderman came out with guns blazing in the proposed Countrywide investor settlement litigation.  It his filing intervening in the action and suing Bank of New York Mellon for breach of fiduciary duty, persistent fraud, and violations of the Martin Act (the "Excalibur" of the NY AG), General Schneiderman didn't mince words.  He explained that the loan transfer documentation for lots and lots of mortgages is FUBAR and that servicers and their vendors are trying to fraudulently paper over the problems (spiced, I might add, with a healthy dose of legalese):

One of BNYM’s primary obligations as trustee under these PSAs wasto ensure the proper transfer of loans from Countrywide to the Trusts.  The ultimate failure of Countrywide to transfer complete mortgage loan documentation to the Trusts hampered the Trusts’ ability to foreclose on delinquent mortgages, thereby impairing the value of the notes secured by those mortgages.  These circumstances apparently triggered widespread fraud, including BoA’s fabrication of missing documentation.  

And how about this one:

Any action to foreclose requires proof of ownership of the mortgage.  This must be demonstrated by actual possession of the note and mortgage, together with proof of any chain of assignments leading to the alleged ownership.  Moreover, complete mortgage files give borrowers assurance that their  properties are properly foreclosed upon.  The failure to properly transfer possession of complete mortgage files has hindered numerous foreclosure proceedings and resulted in fraudulent activities including, for example, “robo-signing.” These fraudulent activities have burdened borrowers as well as the courts with flawed foreclosure proceedings.   

BNYM is putting on a brave face, but I don't see how they have a leg to stand on in this.  The last thing they really want to do is go to the mat on whether the loan documentation is up to snuff.  It ain't.  The only questions are when they settle on this, what terms the settle on, and whether they can settle by themselves, without pulling CW/BoA into the deal.  And if that happens, it sets the floor for settlements with the other major servicers.  

I should mention that this is hardly the first time the NY AG has had to clean up the mortgage trustee business.  In the 1920s and 1930s, the NY AG had to deal with mortgage guarantee certificates (an early sort of securitization) that featured rampant fraud and real estate bond houses, which again featured rampant trustee fraud (using principal payments from one bond to hide defaults on interest payments on others, etc.)  The result was eventually the Trust Indenture Act of 1939.  Guess what the TIA doesn't cover?  MBS. Maybe it's time to change that.  Rep. Brad Miller has legislation (H.R. 1783) that would do just that.