May 1st, 2011
in Op Ed
Guest Author: Michael Collins, originally posted at The Economic Populist
The Federal government is about to settle the ForeclosureGate affair, according to a report in the New York Times on April 9. The Times noted that twelve million homes will be lost by 2012. Home equity values are down by $5.6 trillion since the real estate crash.
The proposed settlement culminates an effort by federal prosecutors to address strongly supported allegations of widespread mortgage fraud perpetrated on as many as sixty percent of current mortgage holders. Homeowners were sold mortgages, serviced for the loans, and, in some cases, subjected to foreclosure and eviction based on fictional contracts and collections practices that violate the most basic principles of contract law and specific federal code pertaining to fraudulent debt collection.
When Wall Street got massive bailouts in 2008, the ultimate rationale was, pass the bailouts or face a complete financial collapse. We are already hearing hints of a similar deep rationale in the ForeclosureGate affair. `
The proposed settlement will not move the evicted back to their homes. It will not establish a moratorium on foreclosures, running at over a million per year. There will be no cram downs forcing the banks to absorb part or all of inflated housing prices caused by a real estate bubble that the banks and Federal Reserve Board helped create. In addition, be assured that the settlement will not hold bankruptcy courts accountable nor the attorneys for their failure to spot obvious errors in bankruptcy proceedings, errors that would have invalidated many creditor claims.
The settlement, however, will create a private relief for the big banks, regulators, and politicians responsible for this mess. The relief will spare the bankers prosecution under existing laws and seriously complicate lawsuits that have the potential to devastate lending institutions by righting the wrongs done to citizens.
The housing market will limp along. The politicians who stood by during the entire affair will claim that justice has been done. The big banks will stumble in their comatose state scavenging for the next financial scheme. There will be no justice for the people, only rewards for the perpetrators.
How can we be sure of this? Because...
The gross violations of acceptable contract and business practices are facts broadly publicized by lenders and others involved. These practices cannot stand the scrutiny of basic legal analysis, as will be demonstrated below.
Some of the most powerful and wealthy individuals and corporations in the land committed these violations. Therefore, the most powerful and wealthy will escape justice and reap even more financial rewards. That's how things work in a rigged system. It's axiomatic.
Just look at the bipartisan response to the financial collapse of 2008. Those responsible received massive bailouts and regulatory favor while citizens paid the price, captives of a seemingly endless recession with limited assistance from the government they support.
Let's examine the legal threat to the big banks and the wholesale fraud committed by the mortgage registration system put in place by the bankers, the twin threats to the wealthy and powerful. The truth is worth knowing before the United States Department of Justice, the big banks, and the others involved lower the curtain on another act in our decline and fall.
The Legal Threat to the Big Banks Requires Private Relief from a Settlement
In the early 1990's, Fannie Mae, Freddie Mac, and the big banks created a new system for recording and registering the sale of real estate. Undeterred by centuries of common law and carefully developed statues in place across the fifty states, the lenders created MERS, the Mortgage Electronic Registration Systems.
MERS altered the function of registering home sales with county officials, named itself as the mortgagee (the lender), and assumed the role of creditor when it was time to foreclose on a property. There are sixty two million mortgages in the MERS system. Forget the fact that MERS had no legal precedent or basis in existing law. There was a higher authority operating, greed.
It all started when some clever Wall Streeter came up with the idea of combining subprime mortgages, loans sold to the least creditworthy buyers, and selling them as premium financial product called mortgage backed securities (MBS). The securities were marketed in the lightening fast international derivatives market. Even though it was required by law, recording the names true investors in the mortgage every time a MBS changed hands wouldn't do. It did not come close to meeting the requirements presented by the constant churn of the international derivatives market. Constant modifications would have prevented the sale of MBS derivatives.
What did the banks do? They created MERS, an entity that recorded and electronically stored real estate sales documents. In the boilerplate contracts for millions of home sales, MERS represented itself as both the loan holder and nominee for the loan holder
Having a real estate registration system in which there was only one named lender, recorded only one time, performed two critical functions. It eliminated the process of modifying loan registrations with county recorders each time the mortgagee changed, i.e., the MBS buyers. It also kept the names of the purchasers far from public scrutiny.
University of Utah law professor Christopher L Peterson recently documented the failures and highly questionable legal foundation of MERS. His comprehensive article was published by University of Cincinnati Law Review (Summer, 2010): Foreclosure, subprime mortgage lending, and the Mortgage Electronic Registration System. Peterson explains and elaborates the logic of key court decisions against MERS. These include the Kansas Supreme Court 2009 ruling and the highly publicized Massachusetts Supreme Court affirmation of the Ibanez case, which devastated MERS.
Peterson summarizes the foundation of his arguments elegantly
"Under this recording strategy, the originating lender makes a traditional mortgage loan by listing itself as the payee on the promissory note and as the mortgagee on the security instrument. The loan is then assigned to a seller for repackaging through securitization for investors. Instead of recording the assignment to the seller or the trust that will ultimately own the loan, however, the originator pays MERS a fee to record an assignment to MERS in the county records. MERS's counsel maintains that MERS becomes a mortgagee of record even though its ownership of the mortgage is fictional" (p. 1370).
MERS placed homeowner mortgage in a fictional system that, without any doubt, fails to meet standard of contract law. The real mortgagee (the lender) is never mentioned. MERS is represented as the lender from the start to finish.
When the mortgage finishes in a foreclosure, MERS compounds the fiction. Peterson notes:
"To move foreclosures along as quickly as possible, MERS has allowed actual mortgagees and loan assignees or their servicers to bring foreclosure actions in MERS's name, rather than in their own name" (p. 1372).
Peterson's arguments attacking the legal basis for MERS are devastating. (Headings below in italics are from Peterson.)
A. MERS Does Not Own Legal Title to Mortgages Registered on its Database
This is a given.
"Federal consumer protection and bankruptcy law also suggests that the MERS does not own legal title to loans registered on its database. For example, under both the Truth in Lending Act and the Home Ownership and Equity Protection Act, a mortgage assignee can be liable for an original lender's violations of those statutes" (p.1378).
Since MERS does not own legal title, it follows that the loan process represents a deliberate misrepresentation. Surely, MERS knew that it didn't meet the standards for ownership. That didn't stop the organization and its creators, the big banks, from proceeding with over sixty million contracts for home purchases.
B. MERS Lacks Standing to Bring Foreclosure Actions
In order for MERS to act as the named party in a foreclosure action, it must have suffered injury by the homeowner's failure to make loan payments. Peterson is clear that the investors who purchased MBS can show a clear injury. However, these investors are not named in the recording documents. MERS is. Peterson makes a salient point with this question, "How [can] a debtor's failure to pay causes an injury in fact to MERS, a company that has no factual expectation of receiving loan payments or the proceeds of a foreclosure sale" (pp. 1381-1382).
How can MERS sue for legal relief when there is no injury, no financial harm?
The run rate for foreclosures has reached a million per year. That represents a great deal of harm to homeowners and their families. MERS caused this harm by its foreclosure actions, yet it never suffered any losses, the "injury" that Patterson references. MERS lacked the standing to initiate foreclosure actions and it lacked the right to allow lenders and servicers act in its name when they initiated foreclosures, as Peterson demonstrates.
C. MERS's Foreclosure Efforts Implicate the Federal Fair Debt Collection Practices Act
When MERS files bankruptcy claims or allows others to do so in its name, it participates in collecting the debt for the delinquent loan. It is a debt collector, plain and simple. As a result, it is subject to the Fair Debt Collection Practices Act (FDCPA). Why? As Peterson notes, "because MERS remits all proceeds of its collection activities to the actual owner of the loan (usually a securitization trustee), MERS is collecting a debt that is owed to another business entity" (p. 1386).
How does MERS, as debt collector, violate the FDCPA? Patterson makes these clear arguments:
"… the statute forbids harassment, false or misleading representations, and a variety of other unfair collection tactics, including threatening foreclosure when not legally entitled to do so.The statute also includes disclosure provisions, such as a requirement that debt collectors give consumers written validation and verification of the debt itself, as well as the identity of the creditor to prevent collection of debts or fees not actually owed" (p. 1386).
Since MERS is not the creditor, it has no right to represent itself as so. As such, it had no right to seek foreclosure. In doing so, MERS engaged in "unfair collection tactics." MERS failed to identify the true creditor for the mortgage. In doing so, it failed to meet disclosure provisions of the FDCPA and is subject to available penalties.
MERS initiates the collection of debts that is has no right to collect. This sounds like the definition of "constructive fraud: when the circumstances show that someone's actions give him/her an unfair advantage over another by unfair means (lying or not telling a buyer about defects in a product, for example)" Law.Com. MERS knew the defects in its mortgage agreements and system. It follows that the collections actions had no basis as well. The organization and its backers never thought anyone would ask.
D. Loans Recorded in MERS's Name May Lack Priority Against Subsequent Purchasers for Value and Bankruptcy Trustees
"Under state law, if a mortgagee fails to properly record its mortgage, and then someone subsequently buys or lends against the home, the subsequent purchaser can often take priority over the first" (p. 1394).
MERS ignored the well-established legal processes that give priority to properly recorded mortgages. Peterson explains this at some length citing the original mortgage recording statute laying out the consistent requirements found across the nation today:
"… the very first American recording statute, adopted by Massachusetts Bay Colony in 1640, required recording the names of the parties-including both the names of the grauntor and grauntee…"
This standard is virtually unchanged in the vast majority of state code. This legal standard, "does not contemplate nor allow obscuring actual ownership through naming only a mortgagee of record in nominee capacity" (p. 1396).
Since MERS ignored state law in recording mortgages, the claims to the property can be usurped by others with properly recorded documents. This throws into question any value that the purchasers of MBS have to recover their investments.
Absolute Requirements for any Settlement with the Lending Industry and Big Banks
The entire enterprise of mortgages issued through MERS ignored the most fundamental legal requirements set out in state law developed over centuries. The laws for recording real estate sales are in place, in part, to assure the right to property and protect investor interests. This was no mystery for the banks that created MERS. This was and it is their industry, their business. Their lawyers surely knew that they were up against the entire canon of common and state law. The most prominent legal justification was offered by Moody's. Petersen points out that Moody's offers no legal precedent for the claim that MERS was a legally viable enterprise. Legal advice justified acts that were clearly outside the law.
MERS recording procedures are in place in sixty million mortgages, at least. Petersen's analysis focused on the subprime market but the arguments and findings apply to every one of those sixty million mortgages. They were conceived and executed outside the law. Any US Department of Justice and the state attorneys general settlements must include the following provisions.
1) All MERS based mortgages must be declared invalid.
2) The MERS recording processes must be labeled a scheme that enabled the big banks to sell disastrous subprime mortgage backed securities.
3) MERS must also be labeled as a key player that facilitated the real estate bubble causing the purchase of inflated mortgages. .
3) The MERS system is, therefore, a misrepresentation on its face. It wasn't created to meet any need in real estate finance. MERS services operated on the basis of deliberate misrepresentation.
4) The big banks and others involved knew this was the case. They are liable for the harm caused.
5) All foreclosures conducted by MERS or in MERS name must be declared null and void.
6) The victims of those foreclosures without legal basis must be restored to the homes they lost.
7) The homeowners that were victims of MERS foreclosures and evictions should receive adequate compensation through a formula favorable to homeowners.
8) Every MERS mortgage must be readjusted to a fair market value through the most favorable formula available to homeowners.
Anything short of these remedies rewards the perpetrators at the expense of the victims.
Without these remedies, citizens are fully justified in saying that the legal system is damaged beyond any hope of repair.
Analysis: Wallison is Blind to Accounting Control Fraud by William K. Black
We Must Prosecute Fraud by Washington's Blog
Servicer-Driven Foreclosures: The Perfect Crime? by Yves Smith
Daniel Tarullo – Problems in Mortgage Servicing by John Lounsbury
The Mortgage Mess by Yves Smith
The Alchemy of Securitization by John Lounsbury