Tweet
photo: davidshankbone via Flickr
In a take-no-prisoners decision late last week, a Long Island federal bankruptcy judge ruled that MERS system does not conform to the law and does not provide for valid assignments of mortgages. The decision also suggests that the mere fact of MERS registration very likely destroys the security interests in the property; meaning you would still owe the debt, but the bank has no claim to your house. I have dubbed this Mortgage Fractionalization.
In the same week, a federal Bankruptcy judge in Kansas ruled the opposite way and appears to think that MERS transfers are just peachy. So, if you are MERS and you split decisions you maintain the status quo ante , don’t you?
Well, it appears they are not so confident any more. MERS sent out a memo telling its members not to foreclose using the name MERS as the plaintiff. According to HousingWire.com,
MERS suggested that members bring foreclosures “only in the name of the holder of the note, in the name of the trustee or the servicer of record acting on behalf of the trustee.”
Of course if the judge on Long Island and I are right, and the mortgage fractionalization destroys the right to levy against the house, it won’t matter much what name they use for the plaintiff. I would like to point out that the banks who created and participated in MERS were all headed by sophisticated Masters of the Universe, had access to some of the highest priced legal talent on the planet and undertook the risks of going outside the Torrens title system of land registration. Whatever risk of loss might flow from that decision was well known to those MOTU and they and their banks must face the losses they incurred by their own decisions to use MERS instead of the county clerks and local land offices. This is classic moral hazard analysis.
Allow me to quote Barry Ritholtz:
MERS is an abomination, a legal blasphemy that should be destroyed before it unleashes the four horsemen of the apocalypse.
Amen, brother Ritholtz.
22 Comments
Recc’d, because this post illustrates so well that our self-proclaimed Masters of the Universe aren’t nearly as smart at they think they are.
You see? They can be incredibly stupid. Clever in the short run, yes, but cleverness does not equal intelligence, no matter what the corporate media says. Of course, most of the corporate media is pretty damned stupid, too.
Per Sally Albright to Harry Burns at Katz’s Delicatessen, “Yes, yes, yes….”
This is not an occasion that requires government intervention or a bail-out to help the banksters. It is the opposite. It is one that requires the government to do its job and apply existing law to the bad actors who knew the law and what they were doing when they did it.
To give one thin dime to help the banks or to legislate them an easy out of the quagmire they’ve constructed for themselves would be wrong. To do so while cutting social programs that make life harder for us now and harder still for our children tomorrow would be an abomination. It would evoke a considerable response from a wronged public.
I think the phrase is “Too clever by half.”
tweeted and recommended — thank you
As someone with a title that passed through MERS, I would be totally pleased to send my payments to a NEW BANK, organized by all the people who find out that their titles passed through MERS. The NEW BANK would have a lot of money, and all of the people who participate in the NEW BANK will be given a voice in how to use it.
It could be a new revolution, we organize on Facebook and send the message to Washington. The message is that we want our democracy back, and we will have the money to negotiate to rid ourselves of our unelected leaders: the rich, the corporations.
Wouldn’t legislating to make MERS somehow legitimate amount to passing an unconstitutional ex post facto law?
If I’m right, why do we continue to hear so many people say that MERS will be granted some sort of after-the-fact legitimacy by congress?
Thank you, Cynthia. Recommended.
I’ve always liked the nicely ironic title of the book about the Enron MOTU’s, “Smartest Guys in the Room.”
That said, are we sure the Horsemen aren’t already loose?
As I commented on another thread, the prohibition on ex-post facto laws prevents Congress from making an act a crime when it was not a crime at the time of the act. Congress can remove criminal and civil penalties after the fact.
A big problem for the banks is that Congress has very limited authority over real estate law. It is overwhelming a creature of state law. Corporation law and something called agency law – the rules that say how one person can legally act for another – are also fundamentally creatures of state law.
Creating MERS and its procedures was an attempt by the country’s biggest banks to circumvent those laws and the costs of complying with them. Self-serving banking practice is inadequate to change the law in 50 states. Like the real estate mortgage bubble and the global securitization industry that fed it, MERS was always a Pandora’s Box. Decisions like this are prying it open.
The banks have a mess and have no one and nothing to blame but themselves and their own greed. They have wreaked havoc on millions.
You know, I was just ruminating to myself as I was driving today about the competency of the lawyers who gave the ok for the MERS construct.
I decided that they were could working under a concept similar to “too big to fail” but that should be called “too big to question”.
Or, alternate name, the Who’s Gonna Stop Us principle.
Meaning that if all the biggest banks and Fannie and Freddie decide together that their MERS alias, dba, or whatever you want to call it, is legal, than by God it is legal. It’s as if the MOTU cannot even conceive that some peon foreclosee or Legal Aid attorney or bankruptcy judge would ever dare to presume to question the MOTUs on some inconvenient point of law.
“It’s as if the MOTU cannot even conceive that some peon foreclosee or Legal Aid attorney or bankruptcy judge would ever dare to presume to question the MOTUs on some inconvenient point of law.”
That’s why they call ‘em the MOTU.
Just remember the reaction of the MOTU’s on Wall Street when told they might, might! not get their bonuses.
Thanks Cynthia. rec’d and tweeted.
I think it is a mistake to think the lawyers that ok’d the use of a MERS system were incompetent. No. They had a client who wanted to accomplish the transfer of wealth with no strings attached and they found a way. Now that it has hit a few road bumps, they will find another way.
I defend homeowners in these situations and actually have cases where MERS is listed as a Defendant, on the pretense that MERS may claim some interst in the mortgage/note. I have to bring up the conflict and explain it to the courts all the time.
As long as the Banks are trying to make and maintain money they will have lawyers who will justify to them and to the courts that what they are doing is perfectly legal. They are counting on not getting caught. And when caught they will got to plan B. Plan A is you lose money, Plan B is you lose money. Perfectly consistent.
One thing needs to be made clear. The creation and use of MERS is not an oversight. It’s not a mistake. The way it operates, its failure to comply with applicable law and established practices, is not a bug that wasn’t recognized or caught by analysts or lawyers.
MERS was explicitly designed to do what it does in the way that it does it. Those were choices made by top executives at commercial and investment banks and Wall Street law firms.
They were highly compensated for having achieved two things: for having “saved” billions in administrative costs, by cheating states out of recording fees; for helping to create a publicly opaque process that hid the ways in which fractional interests in mortgages and promissory notes were created and traded around the globe.
Undoing the massive harm caused by this process will take years. It will be highly fragmented, because 50 states will devise 50 different imperfect solutions. Some won’t fix anything.
That’s only part of the problem, a process part. Ineffectively regulated banks still refuse to renegotiate legitimately troubled loans, refuse to rewrite egregious contract terms, refuse to write down the value of depressed assets. They still extract billions in exorbitant fees from current and past due debtors. Collectively, those extend the current depression, depress families and the communities in which they live. Rape and pillage are so much easier in an Armani than a suit of armor, with a lobbyist rather than a broadsword.
might flow from that decision was well known to those MOTU and they and their banks must face the losses they incurred by their own decisions to use
http://www.siyahmermer.org
While I admit that the law has not often been applied in the manner I describe, there is some history that indicates the court might interpret the matter differently in a particular case, and it’s interesting that the case involves property rights;
From Answers.com http://www.answers.com/topic/ex-post-facto-law
“The Constitution did not provide a definition for ex post facto laws, so the courts have been forced to attach meaning to the concept. In Calder v. Bull, 3 U.S. (3 Dall.) 386, 1 L. Ed. 648 (1798), the U.S. Supreme Court provided a first and lasting interpretation of the Ex Post Facto Clause. The focus of the Calder case was a May 1795 resolution of the Connecticut legislature that specifically set aside a March 1793 probate court decree. The resolution allowed the defeated party in the probate contest a new hearing on the matter of the will. The Court in Calder ruled that the Connecticut resolution did not constitute an ex post facto law because it did not affect a vested property right. In other words, no one had complete ownership of the property in the will, so depriving persons of the property did not violate the ex post facto clause. The Court went on to list situations that it believed the clause did address. It opined that an ex post facto law was one that rendered new or additional criminal punishment for a prior act or changed the rules of evidence in a criminal case.”
I have a REALLY bad feeling about the 50 state AG investiagtion. At first I applauded it b/c I naively thought it meant there would be prosecutions in all 50 states.
Have you seen any?
What I have heard is lots of chatter about a 50 state “settlement”.
This causes me stomach pain.
I agree with you that it’s not competence as much as it is acquiescence. Some legal and/or compliance departments act like their directive is not: is it legal? but rather: how can we make it seem as though it’s legal, or even make it legal, damn it!
I also think the same IBG,YBG (BTTTSHTF)* theory that works for Wall Street is in play.
*I’ll Be Gone, You’ll Be Gone (By The Time The Shit Hits The Fan)
The State of Utah seems to be fighting pretty hard to maintain their state laws from being usurped by BoA and their foreclosure arm Recon Trust.
http://www.kcsg.com/view/full_story/11469466/article-Bank-of-America-Unit-Focus-of-Utah-Foreclosure-Lawsuit?instance=home_first_stories
A tobacco industry-sized settlement – with no admission of wrongdoing, of course – might help replenish state coffers and make happy Republican and Democratic governors alike. Presumably, it would also be less than the MERS and the banks cheated the states out of in the first place.
What it wouldn’t do is resolve the serial, intentional violations of state laws, which would take concerted legislative action, and be done in the face of thousands or more civil actions, foreclosure actions, bankruptcy cases.
All of those would involve mightily aggrieved voters that wouldn’t be likely to vote again for whatever governor and his party attempted to legislate away their rights in exchange for a little quick cash for the states and a lot of campaign contributions from lobbyists, who would be happy to take their cut from every dime spent.
But I think you’re right. That is probably one bag of sand comprising the banksters’ redoubt. Governors are already salivating about receiving proceeds while they’re still in office.
When you get a chance, can you explain the term, from your earlier piece in which you coined the great term mortgage fractionalization, the term of art, interest in the mortgage as opposed to interest in the debt? It seems to be the point at which the loan becomes ordinary uncollateralized debt, but is that similar to the principle that if none of these banks is responsible for keeping up the property — mowing the lawn, checking on the sprinklers, etc. — that none of them can foreclose, either?
It’s the debt that’s fractionalized, in the sense that individual debts are bundled together into very large pools. Small parts of such large pools, a few cups or a gallon from the swimming pool, are sold and resold to investors around the world. There are lots of pools, each bundling debt obligations from many borrowers.
The idea is that an investor is not buying or selling an interest in Mary or Joe’s debt on their house on Plum Street. An investor is buying a tiny or fractional interest in a pool, which is comprised of the debts owed on a thousand houses all over the city.
The assets in those pools are of two basic kinds: the debts themselves and the cash flow they generate. From the pool’s perspective, it’s like owning a CD at a bank: it owns the deposit and the interest it generates, too. Investors in these pools buy small or fractional interests in either the debt they own, or in the cash flow generated by it. There are lots of permutations, but those are the two most basic.
The term “mortgage debt” refers to a debt obligation where the borrower’s promise to pay is secured by a lien on real estate. The lien in this case is called a mortgage, which gives the lender the right to foreclose if the debtor defaults.
That right to foreclose can be lost if the documents creating it are not processed properly when they are first created, or when they are subsequently sold or transferred. The main documents are the promissory note and loan agreement, which evidence the borrower’s obligation to repay a loan, and the mortgage agreement, which grants a lien on the real estate the loan was used to buy.
MERS’s big problem is that its processes failed to handle those documents correctly. It seems to have explicitly chosen to separate the loan and note from the mortgage, when state laws require keeping them together in order to maintain the right to foreclose.
Taking MERS out of the picture is a stopgap measure; it won’t cure the problems in its prior mishandling of the paperwork on 50 million mortgages. The problem is the business model that the banks which set up MERS chose; it’s not simply a “paperwork” problem that can be fixed by getting a couple of signatures long after the fact.