TBTF MoRTGaGe FuBaR
I just came across this hypothetical scenario presented by John Carney (CNBC NetNet Blog). It is a great example of how last week's Ibanez decision will put a severe monkey in the works of the TBTF fraudclosure mills.
You will smile when you read this and you will laugh when you think about what it is like to deal with thousands of scenarios resembling this one.
This comes pretty close to the perfect definition of a TBTF FUBAR.
Carney: "Let’s say you are US Bancorp and you find yourself with a mortgage whose chain of title is incomplete. You took the mortgage from a now bankrupt subsidiary of the now bankrupt Lehman Brothers. Getting someone at Lehman to go through the process of executing the assignment is going to be very difficult.
It’s not even clear if anyone at Lehman Brothers has the legal authority to execute an assignment now, while Lehman is bankrupt. In any case, getting the assignment from Lehman wouldn’t really help you. You’d still have a gap in the chain from Option One to Lehman. It’s probably best to skip over Lehman all together and go directly to Option One to ask for the assignment. But you have a bit of a problem. You didn’t buy the mortgage from Option One. They aren’t under any contractual obligation to you to execute any documents. So when you call, here’s how the conversation goes.
US Bank dude: “Hey, can I speak to whoever it is who is handling the Ibanez mortgage?”
Option One guy (after some delay): “No one handles that mortgage. We sold it five years ago to Lehman and closed the file.”
US Bank: “Right. Okay. Well, I need you to find someone who will execute an assignment of the mortgage to me.”
Option One: “First of all, no one who handled that mortgage still works here. You might have heard about the mortgage meltdown, right? Second, we sold it to Lehman, according to the file.” US Bank: “Right. But I bought it from Lehman.”
Option One: “So get the assignment from Lehman.”
US Bank: “They’re an empty company that is in bankruptcy.”
Option One: “I’ve heard about that. Thanks for the news.”
US Bank: “So I need you to execute the assignment.”
Option One: “First of all, you’re going to have to show me that you bought the loan from Lehman.
Second, I need to talk to legal to make sure I can assign a mortgage to someone we never dealt with.
Third, how much are you willing to pay me to do all this?”
US Bank: “Pay you? I already own the mortgage.”
Option One: “The mortgage we sold to Lehman. If Lehman asks for the assignment, we’ll do it as part of that deal. But, as far as I can tell, I don’t owe you anything. If you want an assignment, you’re going to at least be paying the legal bills for the legal opinion that says it’s okay for us to do this.”
US Bank: "You don't have to be an [expletive deleted] about this."
Option One: "I also don't have to give you an assignment."
By the way, if you do get Option One to assign it to Lehman, you might find yourself trapped. In that case, the mortgage arguably becomes part of the estate of Lehman—subject to the jurisdiction of the bankruptcy court. Sure, eventually, you may be able to prove that you are entitled to the assignment from Lehman. But you’ll be fighting the other creditors, who will argue that you are just one more unsecured creditor in a long line of people who say that Lehman owes them something."
WB7: This is obviously a simplification. It is more complicated than this. But this simple example cuts through all the long winded legal explanations. If you were Option One, why would you cooperate without receiving an indemnification agreement, an expense reimbursement and a fee for your trouble? Better yet, wouldn't you just steer clear of the whole smelly mess?
BTW guess who is on the other end of the call:
"Option One Mumbai, can I help you?"
