Countrywide Routinely Failed to Send Key Docs to MBS Trustees, B of A Employee Says

Another American Banker article (subscription required) and some more quotes by Max.

Countrywide, the mortgage giant that’s now part of Bank of America Corp., routinely didn’t bother to transfer essential documents for loans sold to investors, an employee testified.

The testimony — which a New Jersey bankruptcy judge cited in dismissing a B of A claim against a debtor — could complicate attempts by the company to foreclose on soured loans that Countrywide originated and sold in better times.

The B of A employee’s admission that the lender customarily held on to promissory notes could also undermine the industry’s position that document transfers to securitization trusts are fundamentally sound.

O. Max Gardner, a North Carolina consumer bankruptcy lawyer who was not involved in the case, called the testimony “a major problem” for B of A, which acquired Countrywide, the country’s largest servicer of residential mortgages, in 2008.

“These original notes were supposed to be transferred and delivered all the way up the line and for this witness to admit they were never transferred is pretty amazing,” Gardner said.

“I’ve never seen this admitted anywhere.” …

In a Nov. 17 ruling, Chief Judge Judith Wizmur of the U.S. Bankruptcy Court in New Jersey rejected Countrywide’s claim that it had standing to foreclose on a borrower who owed $211,202.41 on a Haddon Heights, N.J., home.

Countrywide originated and serviced the loan.

It securitized the mortgage in 2006 but failed to endorse or deliver the note and other related mortgage documents to the bond trustee, Bank of New York Mellon, the court found. (BNY Mellon had no comment on Friday.)

Linda DeMartini, a supervisor and operational team leader in B of A’s litigation management department, testified that “the original note never left the possession of Countrywide,” and was instead transferred to the lender’s foreclosure unit, as shown by internal FedEx tracking numbers, according to the ruling.

DeMartini “testified further that it was customary for Countrywide to maintain possession of the original note and related loan documents,” Judge Wizmur wrote.

Attempts to reach DeMartini for comment were unsuccessful.

In private-label residential mortgage-backed security transactions, it was supposed to be standard practice for the sponsor of a securitized trust to physically deliver the original mortgage notes to the trustee or custodian at the closing of the securitization.

Typically, lenders endorse a mortgage note “in blank,” similar to a bearer bond or a check made out to cash, giving the holder any ownership rights.

“Most significantly for purposes of this discussion, the note in question was never endorsed in blank or delivered to the Bank of New York,” Judge Wizmur wrote.

Whether a servicer or investor has the standing to foreclose on a borrower has become a major issue since late September, when B of A, Ally Financial Inc.’s GMAC Mortgage and JPMorgan Chase & Co. first admitted problems with robo-signers — employees who signed thousands of foreclosure affidavits without personal knowledge of the borrowers’ debts and without signing in the presence of a notary.

Many defaulted borrowers and mortgage investors are now questioning whether mortgage documents were properly transferred, and whether servicers or third-party foreclosure attorneys may have fabricated documents in courts to prove underlying ownership of the debt.

Judge Wizmur wrote that, in a bizarre twist, Countrywide had filed a “lost note certificate” in 2007, claiming the original note had been “misplaced, lost or destroyed.”

But two years later, in September 2009, it suddenly found the note and attorneys were unable “to explain the inconsistencies between the lost note certification, Ms. DeMartini’s testimony and the ‘rediscovery’ of the note,” the judge wrote. …