Posted on 10/03/2010 7:10:15 PM PDT by blam
Economic Shock Therapy For Wall Street As Mortgage Lenders Could Start Falling Like Dominos
Housing-Market / Credit Crisis 2010
Oct 03, 2010 - 05:09 AM
By: Ellen Brown
“Maybe this is like shock therapy. Maybe this will actually get the lenders to the table and encourage them to work out deals that are to the benefit of everybody.”--Economist Karl E. Case, quoted in the New York Times
The hits are coming fast and furiously. Major Wall Street mortgage lenders could soon be falling like dominos – and looking again for handouts.
On September 20th, Ally Financial Inc., which owns GMAC Mortgage, the nation’s 4th largest lender, halted evictions and resale of repossessed homes in 23 states. This was after a document processor for the company admitted that he had signed off on 10,000 pieces of foreclosure paperwork a month without reading them. The 23 states were all those where foreclosures must be approved by a court, including New York, New Jersey, Connecticut, Florida and Illinois.
On September 24, Representatives Alan Grayson (D-FL), Barney Frank (D- MA) and Corrine Brown (D-FL) directed a letter to Fannie Mae questioning its use of “foreclosure mills,” which were described as “law firms representing lenders that specialize in speeding up the foreclose process, often without regard to process, substance or legal propriety.” The letter followed a report by the Florida attorney general’s office in August that it was investigating three law firms that had allegedly fabricated documents in thousands of cases to obtain final judgments of foreclosure.
On September 24, California attorney general Jerry Brown asked GMAC to halt foreclosures in his state until the lender could prove it was complying with a law that prohibits lenders from taking steps to foreclose a home before making an effort to work with the borrower. California is a non-judicial foreclosure state, meaning foreclosures do not require the prior approval of a court.
On September 28, JPMorgan Chase said it was halting 56,000 foreclosures because some of its employees might have improperly prepared the necessary documents. All of the suspensions were in the 23 states where foreclosures require court approval.
On September 29, the Washington Post reported that a top federal bank regulator had directed seven of the nation’s largest lenders to review their foreclosure processes, after learning about widespread mishandling of homeowner evictions. Besides JPMorgan Chase, they included Bank of America, Citibank, HSBC, PNC Bank, U.S. Bank and Wells Fargo. The Washington Post reported:
The paperwork problems range from potentially forged documents to bank employees who never read borrowers' files before signing off on an eviction. . . .
"While we don't expect our review to find that consumers were harmed, we will take appropriate action if we find any impact," JP Morgan spokesman Tom Kelly said.
No harm perhaps except the illegal taking of thousands of homes without due process . . . .
On September 30, Rep. Alan Grayson posted a devastating seven-minute video, in which he gave four real-world examples of such travesties of justice, including a man who was foreclosed on when he didn’t have a mortgage and paid cash for the home; a home that had two foreclosure suits against it because both servicers claimed ownership of the title; and a couple foreclosed on over a contested $75 late fee. Grayson blamed the massive foreclosure problems largely on the electronic shortcut called MERS. “The banks simply digitized mortgage titles into a privatized system, called the Mortgage Electronic Registry System (or MERS),” he said. “And it did the transfers by trading Excel spreadsheets among the banks and trusts, rather than endorsing the notes as required by their own contracts, by state real estate law and by IRS rules.” He stated that 60 million properties are recorded in the name of MERS -- 60% of the mortgages in the USA, and 97% of the loans made between 2005 and 2008.
On October 1, Bank of America announced that it was delaying foreclosures in 23 states.
The same day, Connecticut Attorney General Richard Blumenthal took the radical step of putting a halt to all foreclosures from all banks in his state.
A Box Even Houdini Couldn’t Escape?
All of this is a major headache for the banks, but according to the New York Times, “The companies say they are reviewing their procedures to take care of any violations.” They seem to think they can correct the problem by redoing some paperwork. But if the holdings in recent court decisions are upheld, it will not be just a question of hiring extra staff to clean up some files. For all those mortgages filed in the name of MERS, say these courts, the chain of title has been irretrievably broken. Humpty Dumpty has had a great fall and cannot be put together again.
MERS is simply an electronic data base. On its website and in assorted court pleadings, it declares that it owns nothing. It was set up that way intentionally so that it would be “bankruptcy-remote,” something required by the credit rating agencies in order to turn the mortgages passing through it into highly rated securities that could be sold to investors. MERS not only has no assets; it has no employees. The thousands of people enlisted to sign affidavits on its behalf are merely conduits. The arrangement satisfied the ratings agencies, but it has not satisfied the courts. Increasingly, judges are holding that if MERS owns nothing, it cannot foreclose, and it cannot convey title by assignment so that the trustee for the investors can foreclose. MERS breaks the chain of title so that no one has standing to foreclose. The homes are effectively owned free and clear.
That does not mean the homeowners don’t owe money to someone. They do. But the claim for relief is not in “law” (by virtue of an enforceable contract or rule) but in “equity” (a remedy provided just because it is fair), and MERS is not the proper plaintiff. Every MERS case involves a securitization, which means the real parties in interest are a group of investors somewhere; and before the homeowners can be made to pay, the investors have to come forward and prove not only that they are the parties owed the money, but the actual sums they are owed. In some cases they might already have been paid; for example, by insurers on credit default swaps held by the investment pool. The investors are entitled to recover in equity only so much as they are actually out of pocket, not the full amount of the original promissory notes, since they were not parties to those notes and there is no way to re-establish the chain of title.
What About the Non-judicial Foreclosure States?
Foreclosures have been suspended by JPMorgan, GMAC and BOA in 23 states, but what about the rest? The others are non-judicial foreclosure states, which means they allow foreclosure through a power of sale clause in a deed of trust without going to court. The presumption is that if the lender doesn’t have to prove his standing to sue before a judge, he can proceed. State laws in non-judicial states allow the sale of a property to satisfy a foreclosure as long as the trustee follows the regulations concerning notice. That would seem to violate Constitutional due process, but the United States Constitution has held that due process protections apply only when the government is involved in the taking of property. When a deed of trust and promissory note are executed between two private parties (homeowners and lenders), there is no automatic due process protection. The homeowners agreed to it in writing; case closed.
But here’s the catch: what if the lender signing the original documents is not the party foreclosing on the property? Then it becomes a question of fact whether the foreclosing party has authority to proceed, and that makes it a judicial issue – a question of fact for the courts. If the foreclosing party can show a clear chain of title – an assignment or progression of assignments from the original lender to himself – he is home free. But courts have increasingly been holding that MERS breaks the chain of title. Foreclosure expert Neil Garfield argues that even in non-judicial foreclosure states, that means the investors have to go to court to prove their case. And when they do, they will run up against the brick wall of MERS. He concludes:
There will be a head-slapping moment when title carriers, attorneys, judges and administrative agencies and clerks suddenly realize that the monster created on Wall Street has its equivalent in the public records of counties across the nation. I doubt if more than 6-7% of all the foreclosures in the past 10 years have resulted in clear title delivered to anyone. And the only corrective instrument can come from the original owner. That homeowner is sitting in the catbird seat and doesn’t know it. Millions of people who THINK they have lost their homes still own them and if anyone wants a signature from those people to clear title, they are going to be required to pay dearly, which is at it should be. Eventually the purse gets returned to the victim from whom it was snatched.
To Subsidize or Nationalize?
Where does that leave JPMorgan, GMAC, Bank of America, and the other major lenders? Investors have massive claims against these banks, and so do homeowners. A major title insurance company has already said it will not insure title to properties foreclosed upon by GMAC until further notice. Moody’s has placed the servicer ratings of GMAC and JPMorgan Chase on review for possible downgrade, and the Treasury is asking regulators for an investigation.
Investment adviser Christopher Whalen thinks we could soon be looking at more Wall Street bankruptcies. If so, hopefully we won’t fall into the trap this time of underwriting the losses while letting the banks keep the profits. If we the people are picking up the tab, we should insist on owning the banks.
This will get real nasty.
There have been movements in many of these states to simplify the foreclosure process. Meaning the banks are lobbying to eliminate the requirement for courts. I know there has been a lot of activity on this in Florida.
I wonder whether those actions will move forward. Turns out we just might need some oversight of these banks.
“If we the people are picking up the tab, we should insist on owning the banks.”
No we should let them fail.
Yes, it will, and not necessarily right now or all at once.
The end result of this Charlie-Foxtrot is that titles to real property that have been foreclosed upon might not be quiet. Purchasing a property that has been through a foreclosure based on documentary fraud upon the court(s) is going to be fraught with hazards for investors, banks and homeowners alike.
All of this is a by-product of Wall Street’s “financial innovation” since the mid-80’s and the securitization “industry.” They wanted to pass around blocks of mortgages very quickly, so these mental deficients invented MERS. Unfortunately, they designed it to work when foreclosures were well under 2% of all mortgages, not when they’re running nearly 10% of the market in some areas. Now that there is a substantial number of foreclosures to be processed, they realize that the system designed to facilitate free exchange of the MONEY behind the note does not facilitate actual exchange of, you know, THE NOTE ITSELF.
And now they’re screwed. So to try to get around the deficiency in the “design” of the MERS system, the bank fraudsters are resorting to outright fraud: Fraudulent affidavits of foreclosure, fraudulent affidavits of process service, fraudulent claims of lost titles, etc.
Correct!
No More Bailouts!
Stupid people should be allowed to fail. That's the way it's been forever.
PING!!!
Yeah, I suspect it will. If judges start seeing a pattern of fraud here, then it’s going to be the pucker heard across the country.
The good news is that the banks are going to be forced to come to the table and hammer out a deal. The collateral damage will be the housing industry, though. You’re looking at a future where no private party is going to be willing to make a mortgage except under very stringent guidelines that few will be able to meet. And it’s going to get much more expensive.
Interesting summary of the issue(s). Greed slaps the big shots up side the head, yet again.
In hindsight, I think the biggest failing in 2008 was not allowing the banks to go down in flames, ala Lehman.
The bank frauds wanted to panic everyone that the world would end if they ended. But the Lehman case shows that the world kept spinning around the Sun without Lehman.
Would a bunch of large banks failing been disruptive? Yes.
Could we have gotten by? Yes.
The problem here is that the backstops and prop-up jobs don’t teach the bank frauds a lesson other than “crime pays.” They’ve learned that the party who likes to talk about a “free market” is just talking, and that the party who talks about being on the side of “the little guy” will very happily rob said “little guy” to hand anything found in the pockets or purses of “the little guy” over to the fat cats at the banks.
Amen.
Besides all of the right reasons, there needs to be the realization that government ownership does not mean "the people" own anything. Bloody Marxism is all that is.
Everytime a property changes hands, here in Iowa at least, it is recorded at the county level. It soumds to this layman that MERS was set up to liquefy, if you will, a very illiquid asset - real estate.
A lot of folks seem to think this charlie foxtrot is going to result in a free house. It might in some cases, but it will become unsaleable in the future.
Since much of the nonsense in recent decades is by design rather than incompetence, what’s the deal here?
No matter how bad the failings would have been in 2008, all that has been accomplished is that the (delayed) inevitable result will be much more painful.
It will only be nasty if the handouts continue. The sooner they fall, the better.
The market always works, if left alone.
How can anyone with a mortgage be certain their payments are in fact, going to the correct entity?
Thanks for this article! This is the first article I’ve read that even begins to explain what the hell is going on that I’ve even been able to half-way understand. It’s flat out incredible.
Find later.
Your payments should be going to the “servicer” of the loan, which is not always the assignee of the loan (ie the person or company that holds the note on your property).
If your mortgage is registered in the MERS system, you can call MERS and, with your property title description or loan originator #, should be able to determine who the loan servicing company is now, and where your payments should be going.
Outside of that (eg, if you’re in a rural county not yet infested with MERS into your county recorder/clerks’ office) you need to go see your title/deed and start from the lienholder on your deed and start calling.
Following is a table of the affected states.
Connecticut
Florida
Hawaii
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Nebraska
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Pennsylvania
South Carolina
South Dakota
Vermont
Wisconsin
The fact is that the banks loaned the money and the borrower defaulted. There was a contract. The banks certainly did many things wrong, but is it right to allow the borrower to keep his house for free? This will potentially bring down the entire system if it is not fixed. No one will make another mortgage payment again, whether they can afford it or not.
This is nothing short of judicial repudiation of virtually all mortgage debt that has been securtized or sold off. While some home debtors will no doubt be happy with this outcome, it could well be the final nail in the American Economys coffin.
And do you really want the Bamster taking full control of the too big to fail banks?
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