We get that banks did a terrible job with respect to many foreclosures, which is the robo-signing scandal. They should be held accountable for wrongfully kicking people out of homes. But, those faulty foreclosures and the housing meltdown are two separate things. Still, the administration is trying to link the two as justification for making banks spend $20.0 billion to modify loans of delinquent borrowers. This is straight out of the community activist handbook; some would call it economic justice, while others would call it robbery.
Sure, it seems to make sense that banks would be modifying loans anyway, but the fact is they aren't, because it's not about the monthly note for so many homeowners; it's about the fact the value of their homes has been sliced too deep to ever hope to break even. I suspect that, in addition to the cost, banks must be worried about just how far government will reach into their business. If modifications don't work, and the majority probably will not, the next step is to force banks to lower principle. Of course, it's not clear this isn't already a plan in the works.
This comes to a head just as Republicans are pushing through a bill to kill HAMP, which Jim DeMint (R-SC) calls a "disastrous mortgage program." The program was announced with fanfare, with the promise to help up to 3 million Americans stay in their homes, all for just $30.0 billion. The plan hasn't worked, as only 250,000 or so Americans have been able to stay in their homes. There is no doubt the plan has failed, and coupled with all the other schemes, has prolonged the natural course of things. People think I'm crazy when I say a sharper, more painful freefall would have been preferable to the agony of dragging this along through a series of ultra-expensive speed bump programs.
It's all coming to a head, and here are the players:
- The White House: Looking for Street cred after it bailed out banks that have been doling out giant pay and bonus packages and just announced massive hikes in their dividends.
- The GOP: Beholden to the Tea Party, which is adamant about the slippery slope of moral hazard and the use of taxpayer funds to achieve a form of social justice.
- The banks: Looking for true independence but staring down the barrel of Dodd-Frank and its endless string of fresh rules and regulations.
- MERS: The electronic system that became steroids for the housing market. This system allowed for the supersonic movement of mortgages, to the point where many were lost in the haste to dump them to the next sucker. The system was created in 1997, and from what I understand never had more than 50 employees although it holds title to approximately 60 million mortgages. The players behind MERS include Fannie Mae (OTCQB:FNMA), Freddie Mac (OTCQB:FMCC), JP Morgan (JPM), and Bank of America (BAC). Talk about witches surrounding a giant cauldron and one heck of a brew.
MERS, as I've written many times, is a mess that cuts across party lines and speaks to the desire to grow homeownership in this nation by any means necessary. MERS is no longer operating in the shadows, but it's still something of an enigma. Yet more and more people are challenging MERS, and the notion that state laws requiring mortgages to be held by county clerks can be usurped to the point where the original paperwork is lost in the black hole that is cyberspace.
The legal battles have gone back and forth, only adding more confusion to the situation. It is because of this legal seesawing that scuttlebutt began late last year of a bill that would ratify MERS under the interstate commerce clause and approve its actions and functions retroactively.
Apparently, the White House is prepared to sign such a bill into law. Of course, that would cement every scheme ever cooked up by conspiracy theorists.
In February, U.S Bankruptcy Judge Robert E. Grossman opined that MERS could not act as a "common agent" for undisclosed principals under law. Adding that MERS did not have authority as nominee or agent to assign the mortgage, absent a showing that it was given specific written directions by its principals. Saying he knew his decision would have "significant impact," Grossman nonetheless said MERS isn't an agent of the banks that own the mortgages. The news was cheered by a wide spectrum of people looking to keep their homes without further payments. Then, modification is a moot point.
Since Grossman's ruling, MERS has won a string of legal victories.
- March 29, 2011: The U.S. District Court for the District of Oregon ruled in favor of Mortgage Electronic Registration Systems, finding it a proper beneficiary on the deed of trust assigned to Sun Trust.
- March 28, 2011: The U.S. District Court of the Eastern District of California dismissed with prejudice a False Claim Act suit.
- March 23, 2011: The U.S. Bankruptcy Court for the District of Wyoming ruled last week in favor of MERS, and affirms the company's ability to assign based on terms of mortgage.
- March 21, 2011: Two federal judges in the United States Court for the District of Utah ruled in favor of Mortgage Electronic Registration Systems.
- March 3, 2011: The Supreme Court of the State of New York County of Bronx held that mortgage documents granted broad powers to MERS to act as an agent for the lender, including the power to foreclose on the loan and to assign it.
There is no doubt in my mind MERS trampled on consumer rights and was used by everyone from the industry to politicians to speed up the goal of home ownership. But Fannie Mae and Freddie Mac have sucked up closer to $200 hundred billion in taxpayer funds and will suck up even more, so that takes us back to banks.
They should be hit on the knuckles for robo-signing, and they should never be bailed out again, but we cannot allow them to be pushed around into doing things they don't want to do. Of course, there are still 300 banking rules still to be written, so they may be persuaded into accepting $20.0 billion instead of more draconian measures.