FUBAR Mortgage Behavior: Florida Banks Destroyed Notes; Others Never Transferred Them

A great article by Yves Smith at her excellent blog, Naked Capitalism.

I’ve had a lot of anecdotal evidence to support the idea that these procedures, which were created in the early days of mortgage securitizations, were simply not observed on a widespread, if not a universal basis. My sense is that the breakdown in practice was well underway by 2004, but it may have taken place earlier. For instance, a group of over 100 lawyers in a loose network around Max Garndner, a North Carolina bankruptcy lawyer who has taken a serious interest in this area, now has a standing joke that the first one that finds a deal where the note was correctly endorsed must bronze it and hang it on their wall. In other words, in none of the cases this large group has seen were the notes transferred to the trust properly.

In 2009, the Florida Bankers Association wrote a letter to the Florida Supreme Court objecting to some proposed rule changes for foreclosure cases. The full text of the letter is here. The critical section:

The reason “many firms file lost note counts as a standard alternative pleading in the complaint” is because the physical document was deliberately eliminated to avoid confusion immediately upon its conversion to an electronic file. See State Street Bank and Trust Company v. Lord, 851 So. 2d 790 (Fla. 4th DCA 2003). Electronic storage is almost universally acknowledged as safer, more efficient and less expensive than maintaining the originals in hard copy, which bears the concomitant costs of physical indexing, archiving and maintaining security. It is a standard in the industry and becoming the benchmark of modern efficiency across the spectrum of commerce—including the court system.

This is highly entertaining, because the excuse is “oh we destroyed the note, so our standard practice is to use a lost note affidavit.” If this was really as widespread as the Florida Bankers Association suggests, they are in a whole heap of trouble, because in most (if not all) jurisdictions, original notes with proper wet ink endorsements are required. And in states that are serious about proper procedure (South Carolina, for instance), judges are not going to have much sympathy with the use of a lost note affidavit when the note was destroyed. …

So here we are back to 2007-8. If you and I make a serious mistake at our jobs, we get fired, and if we make a really serious error, our company could perish. But when bankers screw up, and leave a lot of collateral damage in their wake, they are confident that their sugar daddies in DC will clean up the mess for them.

And the worse is they might even be correct if we let them get away with it this time.

Please take the time to read the full article, it is worth your while.