Friday, November 19, 2010

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.


  1. If MERS has been creating problems since the late 90's than I do not think the banks are being realistic when they state that the legal problems they are facing now are "mere technicalities". I agree with another statement made today in the Washington Post: "Fixing MERS on a federal level to give them a free pass from complying with what we have known as the law for many years because the banks screwed up is really a bad precedent," said Ira Rheingold, executive director of the National Association of Consumer Advocates.

    Ms. Rheingold is correct in many ways. Letting the banks get a "win" could have severe consequences in the financial industry, including Washington. Moreover, underwriting standards and the validity of mortgage paperwork is something that has been highly regulated for years by the legislative, judicial and executive branches of our nation. Taking away this oversight and putting all of our eggs into MERS' basket is not the solution to our country's real estate crisis. Instead of providing a scapegoat for big banks and potentially voiding recording laws that have been in place for many years, lawmakers need to take control and create an accurate system that will fix the real estate disaster.

  2. I do not think the mortgage servicing businesses could get a free pass from the US Gov from all the sloppy and fraudulent paperwork. The state courts, federal courts, and bankruptcy courts are ruling either way as to incomplete chains of title, but most courts are not tolerating the fraud. See U.S. Bank v. Harpster, Case No. 51-2007-CA-6684ES, at 2. The court ruled lack of standing on a foreclosure due to a fraudulent assignment of mortgage. There was oral argument last month with the Mass Supreme court regarding the Bank seeking foreclosure not being the true owner of the mortgage. That decision will be interesting. The effects of this sloppy and fraudulent paperwork, or lack of chains in the title will have to be settled by the state courts. By letting them slide will set bad precedences and not fix the problem.

  3. To comment on MERS and about the kings' horses, there is no way congress can pass a bill and "fix" it all. That would contradict Dodd Frank. Each action of fraud is unique. For instance, if a house is being foreclosed on, and the recent court decisions are taking stance that all paperwork in the chain of title needs to be present, and in that paperwork is a fraudulent document, there is no way a federal bill can trump that. That is violation of the homeowners due process rights and since it is a court enforcing the foreclosure (state action) I will bet that will make its way to SC. They also compromise the integrity of our courts. There already are precedents set that have not accepted the fraudulent paperwork. Some of this paperwork that is recorded you cannot make up. See Broward county official records 45927 / page 633, an assignment of mortgage granted to BOGUS ASSIGNEE FOR INTERVENING ASMTS w/ no address. This recording of one of many. I cannot see an honorable judge seeing that as "sloppy" and a technicality. That is an insult to our judicial and recording system and hopefully the banks will pay the price and have to fix it.

  4. On another note concerning MERS and foreclosure mill firm founder David Stern, because of the investigation launched by Fl. Atty Gen, and the moratorium on foreclosures, MERS and affiliated companies had to lay off many employees. According to an article I found on Fannie and Freddie have cut ties with the Stern law firm. (Pretty smart considering they are owned by gov't!). The work flow is clearly choked and has even resulted in a possible default with Bank of America. The result we shall see in due time will involve lack of servicing employees processing modifications. What the Gov't needs to do, at the banks expense is set up a task force to process the mortgages for loss mitigation etc.

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