by Jeff Neilson
A thanks to Edward Harrison who publishes the blog “Creditwritedowns.com” for his superb explanation of foreclosure and title issues dealing with “foreclosed” properties;
Click on title above to see Harrisons article; http://seekingalpha.com/instablog/407380-jeff-nielson/32957-who-owns-foreclosed-u-s-properties-part-i-scam-in-the-making
– in his commentary “What are the legal rights of lenders and homeowners in foreclosure?” http://www.creditwritedowns.com/2009/10/what-are-the-legal-rights-of-lenders-and-homeowners-in-foreclosure.html#ixzz0V58C0GR0
It was that article which inspired me to write about some of the legal ramifications, based upon his research and analysis.
There is a lot of material in Mr. Harrison's commentary, so for those interested in this issue, I recommend going to the source to read it in full. I intend to focus on two of the extremely important issues in that piece: the question of who holds title to a securitized mortgage, and (just as important) who has “standing” to initiate and prosecute a foreclosure.
For people with no familiarity with legal jargon, who has “standing” in a legal proceeding is a question of “proximity” to the case before the court. The test for this issue generally being some direct proprietary interest.
The problem for the Wall Street oligarchs, as they began to hatch their schemes to create the U.S. housing bubble (and their own, concurrent Ponzi-scheme) centered on the importance of their new “invention”: mortgage “securitization”. It is this “securitization” which was the key to creating the U.S. housing-bubble from the supply side – rather than most asset-bubbles which are (at least initially) fueled by demand.
Through this process, banks initiate a mortgage – and then immediately sell it to a 3rd-party. If Wall Street didn't initiate the mortgage themselves, then they became the first buyer in the chain. Once holding this mortgage, these “financial wizards” sliced-and-diced these mortgages, mixed them together, and packaged and sold them in such a convoluted manner that even with the resources of the U.S. legal system at their disposal, courts have been unable to determine who holds clear, legal title to these mortgages.
However, the Wizards of Wall Street anticipated this legal dilemma. In 1995, they created a shadowy entity called Mortgage Electronic Registration Systems (MERS). Wikipedia defines MERS in this manner:
Mortgage Electronic Registration Systems is claimed to be a privately held company that controls a confidential [emphasis mine] electronic registry designed to track mortgages and the changes of servicing rights and ownership of mortgage loans in the United States.
Before I explain the role being played by MERS, and the importance of that role, let me get back to securitization. The reasons why it was absolutely essential in creating a housing-bubble, and Wall Street's subsequent scams are relatively straightforward, when laid out step-by-step.
Wall Street pretended they were “reducing risk” by securitizing these mortgages and more or less moving them off of their own balance sheets. At first, this was probably true: by taking a fixed amount of debt, and dividing it amongst more people, the risk to the system as a whole (and the individuals) is reduced.
As a simple, numerical example, if I take $100 dollars of debt and initially divide that amongst 10 people, there is a given level of risk for each of these individuals and for the system as a whole (if too many parties should default). If I then split that same $100 dollars of debt and divide it evenly among 100 people, then that reduces both the individual risk and the systemic risk – since the smaller the individual debt, the lower the probability of default. The problem was that Wall Street (and the other players in this market) never intended for the amount of debt to remain fixed.
If you then take the same numerical example, but repeat that process nine more times you now have $1000 worth of debt (ten times the original amount) – but split amongst a group which is ten times larger. Thus, not only do the risks of each party revert to the original ratios (and risks of default) but the systemic risk is ten times greater because ten times more money and ten times more players are now identically leveraged.
It was through these debt “daisy-chains” that the Wall Street oligarchs were allowed to move from the reckless-but-standard 10:1 average leverage for this sector to an insane average of 30:1.
The problem was that both ratings agencies and regulators still pretended that there had been neither an increase in individual risk nor in systemic risk. To persuade these accomplices to “look the other way” with respect to risk required adding one, more ingredient: “credit default swaps” (CDS).
These were bogus “insurance policies” created by Wall Street to “insure” its entire Ponzi-scheme. This provided the pretext for credit-rating agencies to continue rubber-stamping “AAA” on these toxic securities, and allowed regulators Ben Bernanke and Tim Geithner (head of the New York Fed, at the time) to pretend that “systemic risk” was being “controlled”.
As I say, this was clearly and obviously fake “insurance”. Because everyone was pretending that systemic risk was only a tiny fraction of what it actually was, the same regulators allowed Wall Street to only list a tiny fraction of the necessary collateral/assets to write such “insurance policies”. It was through the willful participation of the ratings agencies and the Federal Reserve that Wall Street oligarchs supposedly “insured” over $50 trillion of credit default swaps – obviously an impossibility.
We need look at only one recent example of a credit default swap which “blew up” to make it clear that most of this market was a complete sham. In “Bankster Sues Bankster – AGAIN”, I referred to a lawsuit between Citigroup and Morgan Stanley.
In this example, it was Morgan Stanley which wrote the phony “insurance”, and Citigroup which was the beneficiary. Even after Morgan Stanley liquidated the collateral which “backed” this “insurance”, it is facing a 300:1 pay-out on this “policy”. With the entire U.S. mortgage market still sitting with a 10% delinquency level in this $50 trillion insurance scheme, and with each and every pay-out at astronomical odds (due to the grossly insufficient “collateral” for this insurance), a large number of pay-outs in this market must bankrupt Wall Street – as a matter of simple arithmetic.
This is yet another reason why Wall Street is hiding millions of already-foreclosed properties on their books – and refusing to sell them. The moment that the foreclosure sale takes place, the loss on the mortgage is “crystallized” and the credit default swaps are triggered. In my commentary on Friday, I explained how/why I estimated that Wall Street is currently hiding at least 5 million foreclosed properties in this manner. Meanwhile, the next big wave of foreclosures is just to about to begin (also covered in Friday's commentary).
Returning to the housing bubble, the conspiracy by U.S. regulators and U.S. ratings agencies to allow Wall Street to leverage the entire U.S. financial system by 30:1 (from 10:1) meant roughly three times as much financing available for the same size of housing market. To accommodate the most rapid and extreme flow of “easy money” in the history of human commerce, many if not most U.S. banks simply erased their “lending standards”. Two years before the U.S. housing bubble officially burst “liars loans” had already become a common term of usage within the financial sector. Again, U.S. regulators were silent accomplices in allowing the eradication of lending standards.
Even without the use of such colourful terms to describe this fraudulently-created housing bubble, it would be obvious to any responsible regulator, rating agency, or banker that if you suddenly lend-out three times as much money to a population whose real incomes are steadily falling that their must be a huge increase in defaults. Thus, not only was this housing bubble a massive fraud on the individual level (through liars loans and other derelictions of duty), but collectively it was also a massive fraud, as it had to be obvious to the U.S. government (and specifically the relevant regulators) that there was an unsustainable “bubble” in the sector, as a whole.
This means that day after day, when Ben Bernanke got in front of the microphone to call the U.S. markets, the U.S. housing sector, and the economy as a whole a “Goldilocks economy” (where everything would keep going up in value) he could not possibly have believed his own words. They were uttered solely to enable the multi-trillion dollar Wall Street Ponzi-scheme to ensnare more victims.
It was thus apparent before the Wall Street-created U.S. housing bubble began that it would end in an unprecedented wave of foreclosures and defaults. In Part II, I will discuss Wall Street's premeditated plan for dealing with these foreclosures, through its new “front man”, MERS.
[Disclosure: I hold no position in Citigroup or Morgan Stanley]
Themes: U.S. housing sector, U.S. financial sector, U.S. corruption
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This post has 4 comments:
• Instablog (3)
Great thoughts Jeff.
Truthfully, and no one in America understands this, the "homeowners" are not the people paying (or defaulting) on the mortgage. The owners are the banks.
Once you realize this little nugget of truth and then apply the truth to our situation, it should scare your pants off.
EVERY program out of WDC that is "helping homeowners" is not helping citizens, these programs are helping one thing-and one thing only - the banks.
The credits, modifications and stays only help the true owners - the banks.
Yet somehow we citizens believe that Congress is working for us.
Can't wait to read the rest. Thanks
What are the legal rights of lenders and homeowners in foreclosure?
Posted by Edward Harrison on 23 October 2009 at 11:10 am
After I published the recent story on the case against servicing agent MERS in the Kansas Supreme court, I noticed a lot of chatter about some mortgage servicing line items in Wells Fargo’s earnings report. So I wanted to quote a few blurbs from the Kansas Appeals Court and Supreme Court decisions as background for another post on future mortgage service revenue streams in banking.
The Appeals Court case had a narrow focus as to whether MERS was a ‘necessary party’ in this particular foreclosure case. The finding was that MERS was not. The Kansas Supreme court agreed that MERS was not “contingently necessary.” They went further in concluding that the fact that MERS neither possessed the promissory note or had authority to assign it may mean it cannot file suit.
However, because this is not a comprehensive judgment as to MERS’ role as nominee, clarification is needed. Given the number of foreclosures in the US, I expect this case is going to the Supreme Court.
Here are the facts.
Landmark National Bank v. Boyd A. Kessler summary
My summary of the case is as follows:
A homeowner based in Kansas came into economic difficulty, causing him to fall behind on his mortgage and file for bankruptcy on 13 April 2006. While he could have exempted his house in discharging his personal liabilities in bankruptcy, the homeowner opted instead to surrender the house.
Three months after he filed, on 27 Jul 2006, the bank with his primary mortgage decided to foreclose. It did not inform MERS (the central repository which tracks changes in mortgage ownership and servicing rights). Nor did it inform the bank holding the secondary mortgage.
On 6 September 2006, the district court then entered a default judgment and ordered a sale on 29 September 2006. Notice of the sale went out into newspapers and a couple picked up this foreclosed property on the cheap on 14 November 2006. So far, so good.
Except that very day, a full seven after the bankruptcy filing, the secondary bank filed a petition to set aside the district court opinion, arguing that MERS was a “contingently necessary party.” It wanted the money it was owed. And on 16 January 2007, MERS joined the bank in filing. By 1 February 2007, the district court denied the petition to vacate the original default judgment.
The case was appealed to both the Kansas Appeals and Kansas Supreme Courts
Here are some of the issues:
Is MERS as a mortgage servicing registry a “contingently necessary party” in this particular or any bankruptcy involving a property in its database?
In what instances can MERS act as a nominee for the mortgagees in court to enforce a foreclosure?
If MERS can act as a nominee, does MERS have to produce the original mortgage promissory note in order to foreclose?
If MERS can act as a nominee, can a homeowner sue MERS or the mortgage servicing agent for the original lenders’ alleged predatory lending?
Is the mortgage servicing agent a nominee or agent of the mortgagee or even a principal? If so, what are the obligations of the servicing agent to help affect a mortgage loan modification?
All of these questions arise because of the convoluted process we have for mortgages as a result of the mortgage-backed security market. These questions have only become acute because the rise in foreclosures has made them a serious issue.
Excerpts from the Kansas Appeals Court decision
A party is not contingently necessary in a mortgage-foreclosure lawsuit when that party is called the mortgagee in a mortgage but is not the lender, has no right to the repayment of the underlying debt, and has no role in handling mortgage payments.
In a mortgage-foreclosure lawsuit, a district court does not abuse its discretion when it denies a motion to intervene that is filed by an unrecorded mortgage holder or its agent after the mortgage has been foreclosed and the property has been sold
What is MERS’s interest? MERS claims that it holds the title to the second mortgage, not the real estate. So it does, but only as a nominee. In terms of the roles that we’ve discussed in the mortgage business, MERS holds the mortgage but without rights to the debt. The district court found that MERS was merely an agent for the principal player, Millennia. While MERS objects to its characterization as an agent, it’s a fair one.
MERS had no right to the underlying debt repayment secured by the mortgage; MERS did not even act as the servicing agent to receive the payments and remit them to the lender. MERS’s right to act to enforce the mortgage was strictly limited: if "necessary to comply with law or custom," MERS could foreclose the mortgage or enter a release of the mortgage. MERS certainly could not act at odds to its principal, the lender. Its role fits the classic definition of an agent: one "’authorized by another to act for him, or intrusted with another’s business.’" In re Tax Appeal of Scholastic Book Clubs, Inc., 260 Kan. 528, 534, 920 P.2d 947 (1996) (quoting Black’s Law Dictionary 85 [4th ed. 1968]).
Kansas law does require through K.S.A. 58-2309a that a mortgage holder promptly release a mortgage when the debt has been paid; MERS could be required as a matter of law to file a mortgage release after a borrower proved that the debt had been paid. Other than that, however, it is hard to conceive of another act that MERS—instead of the lender—would be required to take by law or custom.
We do not attempt in this opinion to comprehensively determine all of the rights or duties of MERS as a nominee mortgagee. As the mortgage suggests may be done when "necessary to comply with law or custom," courts elsewhere have found that MERS may in some cases bring foreclosure suits in its own name.
Excerpts from the Kansas Supreme Court decision
K.S.A. 60-219(a) defines which parties are to be joined in an action as necessary for just adjudication:
"A person is contingently necessary if (1) complete relief cannot be accorded in his absence among those already parties, or (2) he claims an interest relating to the property or transaction which is the subject of the action and he is so situated that the disposition of the action in his absence may (i) as a practical matter substantially impair or impede his ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of his claimed interest."
The relationship that MERS has to Sovereign is more akin to that of a straw man than to a party possessing all the rights given a buyer. A mortgagee and a lender have intertwined rights that defy a clear separation of interests, especially when such a purported separation relies on ambiguous contractual language. The law generally understands that a mortgagee is not distinct from a lender: a mortgagee is "[o]ne to whom property is mortgaged: the mortgage creditor, or lender." Black’s Law Dictionary 1034 (8th ed. 2004). By statute, assignment of the mortgage carries with it the assignment of the debt. K.S.A. 58-2323. Although MERS asserts that, under some situations, the mortgage document purports to give it the same rights as the lender, the document consistently refers only to rights of the lender, including rights to receive notice of litigation, to collect payments, and to enforce the debt obligation. The document consistently limits MERS to acting "solely" as the nominee of the lender.
The Missouri court found that, because MERS was not the original holder of the promissory note and because the record contained no evidence that the original holder of the note authorized MERS to transfer the note, the language of the assignment purporting to transfer the promissory note was ineffective. "MERS never held the promissory note, thus its assignment of the deed of trust to Ocwen separate from the note had no force."
"MERS does not take applications, underwrite loans, make decisions on whether to extend credit, collect mortgage payments, hold escrows for taxes and insurance, or provide any loan servicing functions whatsoever. MERS merely tracks the ownership of the lien and is paid for its services through membership fees charged to its members. MERS does not receive compensation from consumers." 270 Neb. at 534.
My reading of these statements is that MERS is a nominee and not much more. This should limit its ability to act on behalf of a mortgagee in foreclosure. How much and in what ways due process is at stake has yet to be decided in the courts, the reason I expect this case to receive a look from the Supreme Court.
Landmark National Bank v. Boyd A. Kessler, Kan 2009, No. 98,489 – Kansas Courts Documents
See my post “Why mortgages aren’t modified and what a ruling stopping foreclosures means” for the Appeals Court decision; http://www.creditwritedowns.com/2009/10/why-mortgages-arent-modified-and-what-a-ruling-stopping-foreclosures-means.html
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