Has a MERShole Opened Up?

Ellen Brown penned an article over at HuffPo that sounds much more definitive than it really is, yet outlines a potential major problem for the securitized loan industry:

In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure.

Well, kinda. The entire decision is found here and isn't quite as represented in that article. Nonetheless, it is significant.

A bit of background is in order.

A mortgage is a combination of a promissory note (that is, a promise to pay) and a security instrument. That is, there's a deed of trust and a debt (the promissory note.)

State law governs foreclosure and most states require as a matter of statute that these two items remain intact. Further, most states require as a matter of statute (that is, law) that to foreclose you must present proof that you actually have an enforceable interest. In many cases this requires what is known as a "wet signature" - that is, the actual original signed document from the debtor confirming agreement to be bound to the terms. In addition you must establish ownership of that document - that is, you must show an unbroken chain of assignments from the originating bank to your hand.

This is where the problem comes in - the originating lender has no standing to foreclose once he sells off the mortgage. He was paid in full and thus has no standing to appear in court.

MERS' web page says this:

MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.

They may as well have said "we have decided that we can abrogate state law with impunity." Oh wait - they did, didn't they?

Sorry folks, life doesn't work that way.

If state law requires an unbroken chain of recorded assignments in order to document ownership of a mortgage and thus standing to foreclose, MERS cannot override this state law by fiat.

Many judges, including some in Florida, have held repeatedly that despite the lack of an actual chain of assignments and often despite a lack of actual "wet signatures" on an original promissory note they will evict people from their homes regardless. You have to wonder how many of those judges have been bought, bribed or cajoled by banking interests, given that the purpose of a Judge is to do just that - judge - not write law. If the legislature says you need an unbroken chain of assignments and an original document for it to be enforceable, then it does.

But in other states banks have run into a problem - judges, rather tired of the "fast and loose" way banks have played with the law for the last decade, have put their foot down and actually done their job - that is, they have judged the facts and enforced the law as written.

In those locales MERS has run into trouble.

The underlying issue is that many of these so-called "securities" (MBS, CDOs, etc) were issued "light" of the required legal mandates to keep the chain of assignments and actual consent signatures required for enforcement. Many people charge that the reason behind this was simple volume. I disagree.

I believe that a large part of the root cause of these "lost" documents is to cover up blatant and in many cases outrageous fraud. It is difficult to prove that a bank or other lender knew and ignored stated-income fraud (or allegedly "investigated" and "underwrote" a file when it did not) when the original file has been turned into ticker-tape confetti courtesy of the closest paper shredder!

MERS has thus given cover to a tremendous amount of fraudulent conduct - the very conduct that predatory lending statutes, "wet signature" and "chain of title" laws are supposed to prevent.

The real bottom line here is that securitized bondholders may in fact be holding worthless pieces of paper. My hollering about this began in April of 2007, right when The Ticker began publication, and continued all through 2007.

The shocker to me is that the bondholders have sat still for this as long as they have. The "delay, extend and pretend" game is all fine and well but all making coupon payments by playing "hot potato" does is hold off on the inevitable. It doesn't change a thing in terms of the final outcome, because the cash flow to maturity on these notes doesn't exist!

There's liability in silent consent to getting screwed by so-called "technical" legal defects; you can find yourself on the wrong end of a legal principle called "estoppel." Sucks to be you if that happens, and the "you" in many of these cases are pension funds and others who have a fiduciary responsibility to the final alleged beneficiaries of these "investments."

In point of fact all of these fraudulently-securitized instruments - where the inducement to enter into the transaction included representations about credit quality flowing from the alleged original borrowers and security structure are now known to be false - can be "put back" on the originators and securitizers. That bomb winds up coming to rest square on the balance sheet of the big banks as either principals or the "funding and bundling" sources for the gazillions of small "boutique" mortgage shops that have closed over the last two years.

How long will it be before an enterprising attorney or firm decides to put together a class action with all of the bondholders who are certain to get hosed down the road? Good question. It is in fact one of the mysteries of the present mess that we haven't seen a significant push in this direction as of yet.

I still expect that we will, as the potential recovery (and thus the potential legal fees) are literally in the hundreds of billions of dollars.

Comments

[Thomas LaCour:]

Excellent post, Karl. I have little faith that a judiciary that has run pell-mell down the road of "writing law" as opposed to "judging" will generally stop these foreclosures. In fact, I expect the "general" outcome to be the reverse. If they haven't yet, one or more of these cases will be found for the banks / CDO holders at the appellate level and we'll have yet another fiat abrogation of State prerogative. If it gets to the Supreme Court (where, of course, it should never go due to Constitutional and U.S. Law restrictions on jurisdiction), the current five-judge Statist majority will find for the CDO folks on the basis of "systemic risk."

Sep 22 11:39 AM

[Leftfield:]

Great article. I've read many complaints on SA by homeowners trying to modify terms in ways that would ultimately save everyone the expense and waste of a full foreclosure, and they get a runaround that includes "lost paperwork."
I figure lenders want to keep even nonfunctioning assets that could be modified, as they are, so the can keep them marked to magic on the books. Perhaps this problem of ownership of the loans which went through Wall St. financial engineering is far more significant.
You and I would have to obey the law no matter how inconvenient. Some of our bailout $trillions can be used to figure out these messes. It will cut into bonuses, perhaps, but hopefully also lead to liability and clawback.

Sep 22 11:42 AM

[User241885/...:]

As the author points out, one has to commend the judge in this case for actually applying the law rather than legislating from the bench. The story of the last year seems to have been various departments of the federal government deciding that it was easier to rewrite established corporate jurisprudence than to uphold it. One need only look at mortgage modification as a prime example of a complete disregard for contract law, a substantive right that only each state can modify, not each federal regulator.

But to attribute the motivation of MERS to fraud is a stretch (to quote the author: "I believe that a large part of the root cause of these "lost" documents is to cover up blatant and in many cases outrageous fraud"). First of all, it gives the mortgage brokers, real estate lenders, investment bankers and the securitizing agencies way too much credit for possessing the necessary intelligence required to plan a conspiracy.

More to the point, however, the assignment clause in every mortgage mortgage deed and every promissory note assigns only the financial and security interests in those documents. They do not require the assignor or assignee to attest to any amount of due dilligence about credit quality, verifiable income and assets. NINJA (No Job, No Income or Assets) mortgage pools, while astonishing for their stupidity, are not illegal.

This is an important distinction because the case of Landmark National Bank v. Kesler is simply about "perfecting security interests". The issue here is that for the income stream and other rights like foreclosure to be assignable, you have to record the assignment. It's pretty straightforward. Apparently MERS thought they had a better system than one that has been used over the last three or four hundred years.

No doubt there is fraud on many levels. It seems to be part of the fabric of corporate banking the last decade. The examination of BofA's memos regarding the obligation to disclose Merrill's financials will be a new low in that regard (I just heard that instead of complying with the AG's order to produce relevant documents, they supplied instead e-mails to employees about discounts at Wal-Mart. Nice).

The fraud the author describes will be outed in time but this is not the where the fraud happened. This is where incredible stupidity happened. MERS believed they had a better solution than centuries old established legal precedent. If this was their idea of adapting to the environment, then good luck to them in circumventing the law of evolution.

Sep 22 02:02 PM

[Karl Liesman:]

Karl says, "The shocker to me is that the bondholders have sat still for this as long as they have. The "delay, extend and pretend" game is all fine and well but all making coupon payments by playing "hot potato" does is hold off on the inevitable. It doesn't change a thing in terms of the final outcome, because the cash flow to maturity on these notes doesn't exist!"

You are completely wrong on this. Simply, if bondholders were getting screwed the market wouldn't exist, yet it still does. Please explain that.

Also, take a look at this article and explain why the very real bankers at Lloyds plan to issue MBS. Don't you want to warn the real bankers against ignoring your advice? Is there something you know that they don't or, vice versa, is there something they know that you obviously don't?

Lloyds Plans to Issue Mortgage-Backed Securities

online.wsj.com/article...

09/22/2009
WSJ.com

By MARK BROWN

LONDON -- Lloyds Banking Group PLC plans to sell residential mortgage-backed securities to investors this week in what will be the first such deal from a U.K. lender in 16 months.

The deal is the latest sign that the market for European asset- and mortgage-backed securities is starting to reopen. Also this week, Volkswagen AG is offering €475 million ($698 million) in debt securities backed by auto leases to investors in a closely watched transaction announced earlier this month.

"Issuers have been reviewing the market regularly and they have got more traction in recent weeks," said Jean-David Cirotteau, an asset-backed-securities analyst at Société Générale. "On top of the tightening in secondary-market spreads and the Volkswagen Leasing deal, this is the next leg in the reopening of the market."

Secondary-market spreads on U.K. prime, triple-A-rated RMBS are currently about 1.5 to 1.6 percentage points above the three-month London interbank offered rate, compared with four percentage points in January, as investors stepped back into the market to pick up cheap bonds.

RMBS are issued by special-purpose vehicles that are serviced with the payments made on a pool of residential mortgages, allowing them to be taken off the mortgage providers' balance sheet. In the first half of 2007, U.K. lenders issued €96.2 billion of such bonds, according to the European Securitisation Forum, making them a key source of mortgage lending.

But the collapse of the U.S. subprime-mortgage market all but killed investors' appetite for RMBS and the last U.K. deal that was publicly sold to investors was a £500 million ($812 million) transaction, in May 2008.

The Lloyds bonds, denominated in sterling and euros, will be issued by the Permanent master-trust vehicle, which was originally set up by HBOS PLC, the U.K. lender acquired by Lloyds last year.

Lloyds's deal, Permanent 2009-1, won't use the U.K. government's RMBS guarantee program. The government said in April that it could provide either credit or liquidity guarantees for eligible RMBS, but not both for the same bonds.

Instead, Lloyds said that bond investors will "benefit from a maturity purchase agreement" entered into with the bank.

The deal consists of three tranches, all of which are expected to be rated triple-A. One of the sterling tranches is being retained, while the second will be a minimum of £1.25 billion. According to Lloyds, an affiliate of JP Morgan Securities Ltd. has agreed to purchase that amount of bonds when the deal closes.

The size of the euro tranche will depend on investor demand. Barclays PLC, J.P. Morgan Chase & Co., and Lloyds TSB are acting as joint lead managers on the deal. Pricing is expected later this week.

Write to Mark Brown at [e-mail]

Sep 23 01:15 PM

[OurBroker:]

This is an excellent analysis.

Questions regarding electronic chain of title issues have been going on since 2007 with the decision of Judge Boyko in Ohio.

An additional consideration is that by not recording each new loan owner as note title is changed, state and local governments have lost large amounts of money in assorted recordation fees. They too have a stake in the chain-of-title debate.

Peter G. Miller
OurBroker.com

Sep 25 07:27 AM

[KenInIL:]

AIB radio on Talkshoe (as opposed to BTR) is teaching people how to take advantage of this glitch in the paper trail. As you said it depends on the judge whether they win or not, but some are winning.

Oct 01 02:49 PM

[simon l:]

I never signed anything that gives MERS a right under the mortgage once the lender sells the mortage and note. MERS is a nominee of the lender (and it's successors and assigns, those who take over the lenders' business or did not pay for the note), according to my mortgage. MERS status as lender's nominee ended when the lender sold the note to Fannie Mae, who them buncled it into a pool and sold it to thousands of investors. I never gave agreed to give lender's rights to every principal of MERS.
Only the real party or the holder of the note can claim payment.
Since the lender was paid in full, MERS ceased being nominee of the lender, as the lender sold (did not assign) it's interest and the debt.
Anyway, MERS was nominee mortgagee only, and was given no rights to the debt, only to the security (the mortgaged home), so MERS was not authorized to assign the note to any entity, only the lender had that right.
There is fraud. In a foreclosure proceeding, any bank or servicer becomes assignee through MERS, because MERS is every banks' agent. The assignment is signed by the bank's agent, who poses as an officer of MERS. With assignee status, even if the borrower was totally defrauded at the execution of the loan, the borrower has no recourse, because MERS makes an instant fraudulent conveyance, an assignment to another entity, which then states that they are not liable for the lender's fraud.
I did not agree to anything that said I would give a mortgagee interest to every principal of MERS. Fraud and misrepresentation at the execution.
Just think about all the revenue that was forfeited thru MERS, the next time your car is damaged by hitting a pothole. $30 times 60 million is a lot of lost revenue.
The borrowers (let just say most of them were responsible) were robbed. The investors (let's just say they were responsible, too) were robbed. The government missed the big picture and helped the Banks, who continue to line their pockets. So, it's up to the borrowers and the investors to see the big picture, and sue the banks and GSE's.
We will see the same thing happen 5 years from now, when those who were tricked into modification begin to default. MERS (under it's parent corporation, MERSCORP, which is owned by the banks and GSE's) have a goal: $100 percent market saturation - the people with a mortgage will never own their homes, and the real estate will keep being flipped by MERS and it's members - they won't lose because land is land. take a look at prof of fraud and misrepresentation from MER's own website mersinc dot org.

Oct 13 02:02 PM

[simon l:]

wow - just noticed that fannie mae purchased another 500 defaulting pools from wells fargo in the past 2 months - what the hell gives here?

the fed owns fannie mae, does it not?

fannie mae is holding off on selling the foreclosed properties - the fed will own the land?

and, another 50 backdated MERS assignments of notes to wells fargo today in cook county, illinois - MERS never owned any interest in the notes, how can it assign them to wells fargo?

are the foreclosure judges stupid or what? the assignments aren't even dated, and the assigning MERS officers are the foreclosing attorneys for wells fargo, the notary publics are wells fargo agents - wtf?

i have written the SEC, FDIC, FRB, FNMA, wells fargo, MERS, and others over the past year asking about MERS - it is a "private corporation" and not subject to the FOIA - and not regulated, not licensed to do business in illinois as a mortgage banker, securities broker, loan originator, or anything.

what the hell is going on here? anybody have any news about this?

Nov 21 09:40 PM