Can All The King's Men Put MERS Back Together Again?

If I weren't crying so much about the doings of the lame duck Congress I would bust out laughing (or maybe its vice versa).

Nowhere does the great sausage machine seem more out of kilter than on the issues surrounding the mortgage foreclosure crisis. They seem utterly clueless on what to do. And, as the Congressional Research Service highlights this week, lawmakers really have no way to untangle how any putative bailout legislation would impact the various federal interests in the residential real estate market:

Another interesting wrinkle is that the federal government is an active participant in multiple, and sometimes conflicting aspects, of the mortgage market. For instance, the Department of the Treasury (Treasury) has used Troubled Asset Relief Program (TARP) funds to acquire stock and warrants to purchase stock in banks with significant mortgage-related assets (e.g., CitiGroup) and to implement the Making Home Affordable Program; the Treasury also has used funds from the Housing and Economic Recovery Act (HERA, P.L. 110-343) to purchase millions of dollars worth of mortgage-backed securities from Fannie Mae and Freddie Mac; the Federal Housing Finance Agency (FHFA) is acting as conservator of Fannie Mae and Freddie Mac; and the Federal Deposit Insurance Corporation (FDIC) holds interests in mortgage assets as conservator and receiver over failed commercial banks and thrifts. As a result, the government will be directly impacted by, and at times, will be actively involved in, mortgage-related legal disputes.

So, as I posited in earlier posts, lawmakers should move cautiously in this area, as the possible unintended consequences of any law could prove devastating.

Perhaps the first thing lawmakers must insist upon is that the banks come clean on the depths of the problem. Recent evidence suggests that it is far worse than the banks have portrayed. For example, the Washington Post reports this morning that the banks have launched a major lobbying effort in the halls of Congress which belies their position that this is all about mere legal technicalities and everything will be all right. Similarly, the lawyers in the trenches report with seeming unanimity that none of them ever sees foreclosure cases where the paperwork is in order:

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Matt Taibbi reports the same in a recent Rolling Stone story on this whole mess. This quote represents my worst fears concerning the depths of this crisis underlying the thousands of fraudulently prepared lost note affidavits:

It turns out that underneath that little iceberg tip of exposed evidence lies a fraud so gigantic that it literally cannot be contemplated by our leaders, for fear of admitting that our entire financial system is corrupted to its core — with our great banks and even our government coffers backed not by real wealth but by vast landfills of deceptively generated and essentially worthless mortgage-backed assets.

So, my point is simply that before Congress takes a leap in favor of the megabanks they should at least try to figure out who they are tossing under the bus to save their precious megabanks and just how much money its going to cost the government.

Similarly, they seem powerless to me to change UCC section 3-309 regarding lost notes. That must happen on a state by state basis, and would virtually revolutionize he law of commercial paper which has always made it difficult if not impossible to recover on lost notes except in relatively narrow circumstances.

Congress must wait to define the scope of the problem, its powers, and the interests of the government itself before leaping into the tsunami created by the megabanks to attempt what may well be an impossible rescue. Instead, the administration should fire-up the Dodd-Frank Orderly Liquidation Authority, scatter the megabanks to the four winds, fire and investigate the reckless bank managers, and quickly undertake a massive loan modification program to save consumption and reestablish the rule of law in our economy.