I received an interesting email this morning after being out of the office yesterday celebrating Columbus Day at an Indian Casino.  Someone sent me an interesting video clip from Larry Kudlow’s CNBC show on Monday.  Kudlow hosted a discussion about the foreclosure mess with CNBC’s Diana Olick and The Big Picture’s Barry Ritholtz.  It was pretty ho-hum until the last 3 minutes when the two began to spar when Diana Olick tried to down play the crisis by saying the banks have legitimate reasons to foreclose in the vast majority of these cases and downplaying the number of illegal trespassing claims committed by “Home Preservation” companies.  See below:

I admit I like Diana Olick and I have held back any public comments when I thought she missed the mark.  She had been very kind to MFI-Miami during it’s infancy, she’s interviewed me several times and has said positive things about my websites on her blog and when she did an appearance on Suze Orman’s show last year.  The exposure she gave MFI-Miami lead to me being interviewed by various international media outlets and lead to major law firms becoming clients.  Matter of fact, one of my first victories against a major bank was because a judge in Miami saw an interview I did with her three day prior to this particular hearing.  That interview gave my client’s attorney and me enough credibility to convince him to keep an elderly immigrant family from being tossed out onto the street.

Unfortunately, this sparring with Barry Ritholtz kind of pissed me off because it gave an impression she really didn’t know what the hell was going on.  I began to think maybe Richard Zombeck from the Huffington Post was right when he once referred to her as an apologist for the banking industry.

Originally this article was going to about debunking every one of her comments over the past two weeks.  Then something kind of cool happened today.  She wrote an awesome piece on her blog actually agreeing with everything Barry Ritholz, myself, Richard Zombeck, Martin Andelman and other bloggers have been saying for the past 24 months.

Hallelujah! She’s seen the light.  I think it’s one of her best blogs since last time she wrote about me.  LOL  Seriously, it is a great piece!  See it below:

Foreclosure Fraud: It’s Worse Than You Think

http://www.cnbc.com/id/39634568

There has been plenty of pontificating over the ramifications of foreclosure freezes on troubled borrowers, foreclosure buyers and the larger housing market, not to mention lawsuits, investor losses and bank write downs. There has been precious little talk of what the real legal issues are behind the robosigning scandal. Yes, you can’t/shouldn’t sign documents you never read, but that’s just the tip of the iceberg. The real issue is ownership of these loans and who has the right to foreclose. By the way, despite various comments from the Obama administration, foreclosures are governed by state law. There is no real federal jurisdiction.

A source of mine pointed me to a recent conference call Citigroup [C  4.24  0.06  (+1.44%)   ] had with investors/clients.  It featured Adam Levitin, a Georgetown University Law professor who specializes in, among many other financial regulatory issues, mortgage finance. Levitin says the documentation problems involved in the mortgage mess have the potential “to cloud title on not just foreclosed mortgages but on performing mortgages.”

The issues are securitization, modernization and a whole lot of cut corners. Real estate law requires real paper transfer of documents and titles, and a lot of the system went electronic without much regard to that persnickety rule. Mortgages and property titles are transferred several times in the process of a home purchase from originators to securitization sponsors to depositors to trusts. Trustees hold the note (which is the IOU on the mortgage), the mortgage (the security that says the house is collateral) and the assignment of the note and security instrument.

The issue is in that final stage getting to the trust. The law demands that when the papers get moved around they are “wet ink,” that is, real signatures on real paper. But Prof. Levin tells me that’s not the worst of it. Affidavits assigned to the notes and security instruments are supposed to be endorsed over to the trust at the time of sale, but in many foreclosure scenarios the affidavits have been backdated illegally.

So with the chain of documentation now in question, and trustee ownership in question, here is one legal scenario, according to Prof. Levitin:

The mortgage is still owed, but there’s going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you’re stealing my money. You’re going to then have trusts that don’t have any assets that have been issuing securities that say they’re backed by a whole bunch of assets, and you’re going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they’re going to do, and you’re going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.

Josh Rosner, of Graham-Fisher, put the following out in a note today, claiming violations of pooling and servicing agreements on mortgages could dwarf the Lehman weekend:

Nearly all Pooling and Servicing Agreements require that “On the Closing Date, the Purchaser will assign to the Trustee pursuant to the Pooling and Servicing Agreement all of its right, title and interest in and to the Mortgage Loans and its rights under this Agreement (to the extent set forth in Section 15), and the Trustee shall succeed to such right, title and interest in and to the Mortgage Loans and the Purchaser’s rights under this Agreement (to the extent set forth in Section 15)”. Also, an Assignment of Mortgage must accompany each note and this almost never happens.

We believe nearly every single loan transferred was transferred to the Trust in “blank” name. That is to say the actual loans were apparently not, as of either the cut-off or closing dates, assigned to the Trust as required by the PSA.

Rather than continue to fight for the “put-back” of individual loans the investors may be able to sue for and argue that the “true sale” was never achieved.

Quite the can of worms. Anyone who says that the banks will fix all this in a few months is seriously delusional.