On April 2, 2007, New Century Financial Corporation and its related entities filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court, District of Delaware and is currently heard and administered by the Honorable Kevin J. Carey.
With the filing of bankruptcy, New Century took down a list of affiliate / entities including New Century Mortgage Corporation, Home123 Corporation, New Century Mortgage Ventures, Midwest Home Mortgage, among a host of others. New Century was one of the largest subprime lenders in the boom times. It grew from only $357 million in loan originations in 1996 to over $56 billion in 2005. New Century Financial Corporation listed liabilities of more than $100 million. On May 25, 2007, they filed their form 8-K, a day after stating that they “…probably overstated 2005 earnings.” Ya think?
On March 26, 2008, an unsealed report by bankruptcy court examiner Michael J. Missal outlined a number of “significant improper and imprudent practices related to its loan originations, operations, accounting and financial reporting processes,” and accused auditor KPMG with helping the company conceal the problems during 2005 and 2006. The full report is strangely missing, but you may click here for a partial report.
On December 7, 2009, Federal regulators sued three former officers of New Century Financial Corp., accusing them of misleading the company’s investors about the company’s prospects, as pervasive bad acts in the mortgage industry began to become widely known.
On July 31, 2010, the Los Angeles Times reported that settlements had been reached between the SEC, plaintiffs representing a class of investors, and directors and officers of New Century. The SEC settlement, which involved an action brought by the SEC against three officers of New Century, barred those three officers from serving as directors of public companies for five years, and levied fines and profit-disgorgement on the 3 officers. The corporate officers involved in the SEC matter were Patti M. Dodge, Brad Morrice and David N. Kenneally.
Here we are five years later and New Century bad acts are still proliferating the country. Thousands (if not millions) of loans that were allegedly sold (years ago) by New Century before its bankruptcy are surfacing in state recordation offices… several years after the debtor’s (New Century) bankruptcy was filed alleging to assign mortgages directly from New Century Mortgage to trusts that have been closed for several years.
Homeowners have been unknowingly foreclosed upon with what astute and intellectual judges and U.S. Senators have deemed to be fraudulent documents. The chain of title in these cases is of course a mess.
“To look at this another way,” said one attorney reviewing a questionable New Century Assignment of Mortgage dated in May 17, 2011 to a 2005 Trust that closed 6 years prior, “if the New Century mortgage was property of the estate pursuant to 11 USC § 541 as of 2011 when the assignment was made, the homeowner had a right to be heard in the bankruptcy court. If, however, New Century sold that loan before the bankruptcy – the loan would not be property of the state and the bankruptcy court would not have jurisdiction to hear a complaint or argument concerning the loans.”
In these bank bankruptcies there is a very short window to make a claim, although attorneys on the east coast are trying to reopen the window in New Century to enable homeowners to file claims. In this specific instance, the assignment wasn’t made until May 2011… a long, long time after the trust closed.
However, even the paperwork was fabricated incorrectly – the designated trust actually closed 11 days earlier than the alleged assignment… ‘oh, what a wicked web they weave…’ There should have been a lot more paperwork with a late assignment.
One homeowner, Daneford Wright in Wailuku, Hawaii, was lucky enough to file a claim before the New Century window closed and he received an affidavit from the New Century Liquidating Trust Trustee, Alan M. Jacobs stating his loan was sold on March 22, 2006 to Lehman Brothers Bank (another bankrupt bank as of Sept. 2008) and the servicing was released to America’s Servicing Company on June 1, 2006. His loan was never properly assigned – ALTHOUGH New Century Mortgage Corporation fabricated an assignment of mortgage to US Bank National as Trustee for SASCO 2006-NC1.
It is seriously not clear how much the judiciary understands about this shadow banking and bank fraud, but it is obvious with everyday they get a little bit clearer picture of the enormous amount of damage it has caused.
Early in the New Century bankruptcy a group of banks motioned Judge Carey in June 2008 to allow them to clean-up what appeared to be a ministerial process relating the debtor’s interest in the mortgage loans. The group of banks, of course were the normal cartel players Credit Suisse First Boston, Deutsche Bank, Wells Fargo, Fidelity Nat’l, Ocwen, Saxon, Bank of America…etc.
The banks told Judge Carey: ”As part of their business, the Debtors would typically sell the newly-originated mortgage loans to whole loan purchasers or assign them to securitization trusts. Frequently when the loans were originated, the mortgages were recorded in the name of the Debtor that originated the loan and thereafter an assignment of the mortgage would have been recorded in the name of the assignee. However, in instances where a mortgage loan was repurchased by the Debtors due to, for example, an early payment default by a borrower or a breach of a representation or warranty by the Debtor in connection with the sale of the loan to a third party, the mortgage may remain in the Debtor’s name until it is resold” [see paragraph 7 of the motion].
Now, if that were true - why would assignments to trusts from the debtor, years AFTER the trust had closed, be necessary?
Let’s go back to the November 16, 2010 Congressional Oversight Panel’s (COP) report titled “Examining the Consequences of Mortgage Irregularities for Financial Stability and Foreclosure Mitigation” stated as well as the PSA and New York trust law.
Senator Ted Kaufman warned that the COP investigation found evidence that he stated as the worse case scenario, “considerably grimmer” where “robo-signers served to conceal the fact the banks cannot prove that they own the mortgage loans that they claim to own.”
“[I]n order to convey good title into the trust and provide the trust with both good title to the collateral and the income from the mortgages, each transfer in this process required particular steps. Most PSAs [pooling and servicing agreements] are governed by New York law and create trusts governed by New York law. New York trust law requires strict compliance with the trust documents; any transaction by the trust that is in contravention of the trust documents is void, meaning that the transfer cannot actually take place as a matter of law. Therefore, if the transfer for the notes and mortgages did not comply with the PSA, the transfer would be void, and the assets would not have been transferred to the trust. Moreover, in many cases the assets could not now be transferred to the trust. PSAs generally require that the loans transferred to the trust not be in default, which would prevent the transfer of any non-performing loans to the trust now. Furthermore, PSAs frequently have timeliness requirements regarding the transfer in order to ensure that the trusts qualify for favored tax treatment.”
The COP report was concluded AFTER the banks had snowed the New Century Mortgage bankruptcy court – but nevertheless, late assignments would be void, and the assets would not have been transferred to the trust. Once the report was published it is axiomatic that the U.S. Senate expected the courts to ‘do the right thing.’
Furthermore, as in the Daneford Wright case – the loan had been sold in 2006. It was no longer property of the debtor’s estate and therefore outside of the bankruptcy court’s jurisdiction pursuant to §541, so no matter what the banks “thought” they could sneak by the Judge – it appears it wouldn’t be applicable to Assignments of Mortgage.
In every Assignment of Mortgage case, the trust PSA dictates that the assignments, transfers and sale to the trust must be made by the Depositor… not the originator (New Century). Some attorneys think that because these bogus assignments were made in the name of New Century that it may well open the door for homeowners to petition the bankruptcy court for relief and, of course there may well be more than an appearance of fraud…’cause why were these mortgage documents not assigned to the trusts before the trusts closed?
It’s not hard to understand how judges can be snowed in these cases.
The banks in New Century made questionable statements in their motion to Judge Carey like, ”[I]n addition, with respect to the mortgage loans being serviced by New Century Mortgage Corporation (“NCMC”), the mortgages would frequently be listed in the name of NCMC or an affiliate, even though the owner of the economic interest in the loan would be the securitization trust or whole loan buyer. In those instances, NCMC would only hold bare legal title to these mortgages” [see paragraph 8 of the motion].
Oh pleeeze! In mortgage lien states, like Hawaii for example, it “is to be deemed a mortgage and shall create a lien only as security for the obligation and shall not be deemed to pass title” [HRS §506-1]. But aside from that, servicers are merely debt collectors and if they hold interest in the mortgages – it would have to be a piece of the securities… and then are we talking about a non-negotiable instrument? And at that point, if there is a financial back-end deal – doesn’t it belongs to the creditors (of which the homeowners should have a right to become one of) and aren’t we are back to “property of the estate” and the homeowner’s day in the New Century bankruptcy court?
In any event, it isn’t the servicing rights that are being fraudulently assigned “late” to these trusts. It is the mortgage and the note.
Recently, an attorney asked the New Century bankruptcy Trustee (through the Trustee’s attorneys) to identify a short list of 5 of his clients and provide the name of the entity that New Century sold the homeowner’s loan to. The New Century Liquidating Trust Trustee’s attorneys replied back with a date that the servicing rights of these loans were sold.
Of course that wasn’t the question that was asked – but what reason would the Trustee have to evade the issue of who the loans were actually sold to? Servicers do not sell, transfer or assign loans to the trusts pursuant to the trust controlling documents (PSA). So, do these guys assume that everybody is an idiot until it’s proven otherwise or are they just trying to hide the facts from the Judge and the investors?
In the initial motion [discussed earlier] the banks were cognizant of the fact that there would be millions of cases coming into the bankruptcy court because of the failure to properly assign the mortgages, not to mention the investors’ lawsuits and adversary proceedings. The banks so nicely couched it for the Judge and asked him to “blanket order” that there was no need to pursue relief from stay – that they could clean up this little ministerial mess without bothering the court. They just didn’t tell him that, as it appears, they intended to commit fraud – as they fabricated documents and made late assignments on behalf of the debtor under the guise of a ministerial oversight:
“Additionally, so as to reduce the administrative burden on the Court and substantial administrative expense to the Estates’, the Debtors request that the Court (i) order any party seeking to foreclose upon a mortgage lien recorded against real property in which a Debtor is listed as the holder of the mortgage not to file a motion for relief from stay relating thereto nor to serve any documents related thereto upon the Debtors, the Committee, the Liquidating Trustee/Plan Administrator or their respective counsel and (ii) authorize such professionals to dispose of and discard all such foreclosure pleadings served upon them prior to or following entry of the order granting this Motion” [see paragraph 12 of the motion]. Of course, we’re doing this for you, judge….
On July 14, 2008, Judge Carey gave the banks their blanket ORDER with some precise detail.
However (and knowing what we know now to be true – it appears the banks knew in 2008 exactly what they planned to do), the banks didn’t like the order the way the Judge wrote it and motioned the Court for Reconsideration. In the transcripts, the Judge was clear that the, “Debtor in the joint motion has stated unequivocally that it retains no interest in any of these loans which are the subject of lenders who hold other positions in connection with these properties.” And no one objected.
With this in mind attorneys say that the Judge, at that point, had no jurisdiction over the mortgage loans if the property did not fall under 11 USC § 541. In the transcripts (p.20), Sean Scott from Mayer Brown on behalf of Carrington Mortgage Services interjects:
“As is customary in the mortgage industry here, many of the mortgages remain in the name of the originator, New Century, and the objecting parties have submitted that, that Carrington should simply cause a recordation of the assignments of those mortgages. That would impose significant costs not on Carrington Mortgage Services, because it is simply the servicer here, but in fact our reading of the documents is that the cost of that recordation would fall back upon the estate, and then in particular on New Century Capital Corporation, which is the responsible party in the applicable pooling and servicing agreements.”
Hogwash. It appears Mr. Scott was banking on the fact that the Judge would not be familiar with the Pooling and Servicing Agreements – or maybe Mr. Scott wasn’t thoroughly versed. But the truth is in the documents.
Section 2.01 Conveyance in nearly all trusts defines responsibility of the “players,” for example, it clarifies that the “Trustee shall promptly (within sixty Business Days following the later of the Closing Date and the date of receipt by the Trustee or the Custodian of the recording information for a Mortgage, but in no event later than ninety days following the Closing Date) enforce the obligations of NC Capital pursuant to the terms of the Mortgage Loan Purchase Agreement to submit or cause to be submitted for recording, at no expense to the Trust Fund…”
So… it appears maybe the Trustee did not do its job?? Why didn’t the Trustee “enforce” the obligations of NC Capital at the appropriate time when it first wrote the loans?
Don’t you think the investors would want to know that the assets were not legally transferred into the trust pursuant to the PSA? How about the IRS? And what about the American public? We’re picking up a horrendously large tax tab for the bailout of the banks – don’t we deserve to know of the REMICs have failed and who actually owes all that tax money that was supposed to be sheltered? The borrowers certainly want to know where the collateral is and who they owe – if they owe anything at all. But let’s get back to the investors. This “blanket order” idea appeared to be a great strategy and “not have to alert the investors to the fact that the loans never were properly assigned…”
It’s just difficult to believe that a judge would sweep such a big issue under the rug if he knew. The investors have a right to know – and it’s probably actionable from their prospective. The borrowers have a right to challenge a faulty assignment (see Deutsche Bank v. Williams); and as far as saving the estate money – doesn’t the bankruptcy judge have super powers under 11 USC § 105?
Nobody brought up the fact that the securitized trust Trustees were responsible and apparently remiss because the Trustees, under the PSA SECTION 2.02. Acceptance of REMIC I by Trustee, are supposed to “acknowledge receipt” of the loan documents and that everything is in order pursuant to Section 2.01 [Source: MASTR Asset Backed Securities Trust 2005-NC1]. Well, that apparently didn’t happen either. The Judge could have ordered the Trustees liable for the recordation costs or any of the parties that were responsible for the documents including the servicers and the custodians… and if the investors knew that there were no loans assigned to the trusts – well, now that’s a whole other issue…and the Judge’s own pension plan might likely be affected.
Judge Carey signed another Order on September 3, 2008 that left out much of the original detail, however he penned a couple very important points to this “servicing rights” related order:
The fact is there were loans, likely millions of loans, that were never assigned to the trusts… And certainly, Mr. Scott’s client Carrington Mortgage does not want to alert the investors to the fact that assignments were not made and it’s likely nobody wants to start discussing “why” these assignments were not made on time or what New Century and other banks may have been doing with these mortgages in the meantime because that might mean deeper discussions into shadow banking.
Or maybe the investors (at least their agents) knew that the assignments were not going to be made because these loans were bad to begin with so why assign them when they’d likely default in a couple of years anyway – just a waste of paperwork, time and expense…??? And if that’s the case – their goes their lawsuits … flush – swish!
It’s unlikely in 2008 that Honorable Kevin J. Carey had figured out the depth of the fraud or the securitization and shadow banking scheme. Was he lied to?? Well, that’s for the a judge or jury to decide, but one thing is for sure – if the loans were sold – it would be best to come clean and determine exactly who purchased the loans and what they did with them and why… because they were never assigned to the trusts on time.
As Senator Ted Kaufman warned and COP (who did a thorough and complete investigation - listen up!) has clearly indicated: “if the transfer for the notes and mortgages did not comply with the PSA, the transfer would be void, and the assets would not have been transferred to the trust. Moreover, in many cases the assets could not now be transferred to the trust. PSAs generally require that the loans transferred to the trust not be in default, which would prevent the transfer of any non-performing loans to the trust now.”
What does that mean? It means in many cases that - no, the servicer cannot assign the loans to the trust. It is not just a ministerial procedure if there are documents defining procedures and the procedures are not followed. The title remains with the homeowner in most mortgage lien states.
Thus, the entity to receive the loan in the last sale from New Century (or any of its affiliates) is who (along with maybe the servicer, depositor and the trustee of the trust), have the liability for screwing up the homeowner’s title… And where are most of those “entities” these days? Likely bankrupt, dissolved or being sued for billion$.
Advice to the Courts: Does it have to be said again? The U.S. Senate spent the time and money to investigate these matters and give you enough information to do the right thing. Acknowledge the fraud, wrong doings and/or obvious errors. The pension funds are gone – protect the American homeowner, make good law for the future and write a best seller.
Carey has served on the U.S. Bankruptcy Court for the District of Delaware since December 9, 2005, and was chief judge from 2008 to 2011. He was first appointed as a bankruptcy judge for the Eastern District of Pennsylvania on January 25, 2001. He is a contributing author to Collier Forms Manual and a member of the National Conference of Bankruptcy Judges, and sits on the American Bankruptcy Institute’s (ABI’s) Board of Directors and TMA’s Board of Trustees. Carey is a member of the Judicial Conference Committee on Space and Facilities, and is the bankruptcy judge representative on the 3d U.S. Circuit Judicial Council and on the council’s Facilities and Security Committee. Carey is also a part-time adjunct professor in Temple University’s Beasley School of Law.