Bank of America (NYSE: BAC) was forced into damage control when Linda DeMartini, a team leader in the company's mortgage-litigation management division, testified in New Jersey that it was "routine" for the bank to keep promissory notes even after loans were securitized and sold to investors. Usually, contracts for such securitizations require the documents to be transferred to the trustee for mortgage bondholders. That led a U.S. bankruptcy judge to reject the bank's claim on the house.
Bank of America has now "disavowed the statements by DeMartini, whom it had flown in from California to testify," notes Bloomberg. "It was the policy of Countrywide, which was acquired by Bank of America in July 2008, to deliver notes as called for in its securitization contracts."
A lawyer for the bank tells the news service that the employee was simply mistaken. For the bank's sake, executives can only hope that is the case. If it were truly routine that promissory notes were note delivered, it could impact a huge number of other foreclosures.
In a home purchase, there are two critical documents, the mortgage--or deed of trust--and the promissory note. When a deal is completed, the mortgage must be recorded via image copy in the county land records, and the notated original is returned to the servicer and/or lender to go into a master file. The promissory note, however, is forwarded to a custodian, not unlike a stock or bond; the note in essence trades hands as it is bought and sold in the securitization daisy chain.
When a note changes hands, a notation of that change is made (electronically) on the MERS system, a database of all mortgages. The mortgage always follows the note legally. So, if the note changes hands, the mortgage is thought to be attached. If the note is never delivered, what does that mean for the mortgage?
For more:
- here's the Bloomberg article
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