Monday, November 1, 2010


For purposes of this blog post let us assume that the election tomorrow is irrelevant. Let's assume that whether the Democrats win or the Republicans win, big money definitely wins--and they are perfectly hedged insofar as election outcomes are concerned. Let us further assume that the use of money to influence elections is only one channel by which big money wins in America. Let's assume that jobs, revolving doors and social affinity all play a role in cognitive capture as well as raw economic power.

Based upon the forgoing, I posit that shortly after the election the lame duck Congress will cobble together some bill (which President Obama will sign) that attempts to protect the bankers from MERS Madness, Robo-signed affidavits, mortgage bond putbacks and lost notes. I am not the first to so argue: John Carney of CNBC brazenly argues that "The politicians will not let the financial stability of the largest bank in the nation to be threatened by contractual rights." So now the working assumption is the megabanks are too big to enter into enforceable contracts? Too big to bother with proving their claims in a court of law? We should apparently just let banks file whatever paperwork they deem appropriate and then seize whatever property they want? Not even a completely runaway Congress can go that far.

What would such a bill look like? Almost certainly the bill will give huge windfall benefits to the megabanks and create huge costs down the road for the vast majority of the 99.9 percent of the population that does not occupy the executive suites of Wall Street. Yet, even that will not be enough to rescue the megabanks now. Here is why:

i) The bill would have to legalize, ex post, a huge number of illegal foreclosures. Obtaining an eviction based upon a fraudulent affidavit is illegal, and probably constitutes perjury, consumer fraud, mail fraud, wire fraud, and racketeering. Such misconduct constitutes sanctionable conduct in a court of law and may give rise to civil and criminal causes of action. Moreover, the victims of this misconduct may now have rights to reclaim their homes, pending the banks' ability to exercise lawful rights in a lawful manner. So how could Congress put this rather messy toothpaste back in the tube? They would have to give federal exemptions to fraud, perjury, mail fraud, wire fraud, racketeering and court levied sanctions. They would have to extinguish state recognized property claims of evicted homeowners and in order to make it more profitable going forward to foreclose, they would have to approve a Kafkaesque judicial process for foreclosures that would make a mockery of the rule of law. Would Congress and the President really have the audacity to undermine property and contract rights in a such an unprecedented and pervasive manner? Would even a lame duck Congress go to these extremes?

ii) Consider MERS. MERS has carved-out a legal status that is incoherent to all but (perhaps) itself. MERS does not hold the notes to underlying notes so it cannot foreclose. To fix this Congress would need to change basic property law to provide that a mere mortgage "nominee" can foreclose with no beneficial interest in the underlying note. Then there is the problem that MERS has no beneficial interest in the mortgage. As such it cannot transfer any rights. Thus, it appears that Congress would have to empower a non-beneficial "holder" of the mortgage to foreclose or transfer rights it does not have. This would require deep federal legislative disruption of long-standing state property rights and theory. Indeed, the idea that a mortgage that is assigned without the note is "nullity" is rooted in an 1872 US Supreme Court decision, Carpenter v. Longan. The idea is simply that the mortgage and note should be held by a unified plaintiff with the power to achieve just one recovery.

And if Congress wants to empower this legal ghost to play a central role in our system of tracking, prioritizing and recording property rights, it would need to answer difficult questions. For example, is the federal government willing to guarantee the perpetual existence of MERS? That is precisely what would be needed for a private mortgage registry to track and prioritize property claims on a permanent basis. Is the federal government going to mandate that MERS have the power and obligation to release mortgages when loans are repaid years down the road? Right now, if MERS is mortgagee it is unclear to say the least whether they can release mortgages if they are beneficially owned by others. What economic incentives does MERS have to release mortgages and record the release so that sales may proceed without the cloud preexisting mortgages. And, when this private actor neglects its duties to get tracking right, what recourse do victims have? Simply stated, it is unclear how Congress could legitimize MERS without throwing our entire system of property rights into chaos.

iii) Lost notes. Under the UCC mortgage notes are treated as negotiable instruments. That means like a check, you need the original to get paid. Is Congress really prepared to repeal the UCC insofar as the megabanks and lost notes are concerned? This would expose borrowers to the prospect that they could get sued by a megabank claiming the note is lost, and then get sued again when another holder in due course shows up with the note. Frankly, from a legal point of view, if Congress can change the law of negotiable instruments to save their precious megabanks, they can simply confiscate all retirement assets and hand them over to the banks. That is the essential meaning of lawlessness, folks, it is living in a society where everything is up for grabs at the behest of those holding the most power.

For Congress to jump in and fix these deep-seated legal issues would require it to "bulldoze" on a wholesale basis longstanding state law from contracts to property to negotiable instruments. It would also shred the last semblance of the rule of law in our economy, and thereby doom the US to a second or third world economy.

Certainly the wholesale preemption of state law and retroactive modification of contract and property rights would trigger a major constitutional challenge. It is hard to imagine that the Supreme Court would approve.

But, just in case: when you vote tomorrow, vote for the candidate most likely to hold the banks to account under law, and most likely to impose the Dodd-Frank Orderly Liquidation Authority. That may require thinking outside of the box.


  1. Although the premise and statement of the article stands for the principles of legality and fairness, it would be also interesting to consider the consequences of rigidly applying the existing laws in this case. Which of the two scenarios will leave society better off? Is there a happy medium?

    On a different note, it is likely that in the vast majority of cases, the barrower indeed entered into a contractual agreement with the bank. So, is it equitable to allow the borrower to default because of a defect in the mortgage paperwork?

  2. Recently elected Republican gubernatorial candidate Rick Scott asked a federal judge to strike down a Florida constitutional provision that has funneled more than $22 million in taxpayer money to political candidates during the past 12 years. I wonder if he would have filed such as suit if he’d been running without the financial backing of his own millions. It's already nearly impossible for ordinary people to run for office. Public financing is the only thing that possibly stands in the way of government by the richest or those most indebted to big money interests. Money doesn't make a great public servant, but Rick Scott’s victory evidence that it can get you elected. I think a strong inference can be drawn between the protected rights. According to the Supreme Court's ruling in Buckley v. Valeo (1976), expenditures made independently of a candidate's campaign could not be limited under the Constitution. If expenditures are made in "coordination" with a campaign, however, they may be regulated as contributions. If we want to stop big banks and interest groups from unfair protections, then we need to start with stricter regulations of campaign financing so that candidates are judged equally on their merits, not their name recognition.

  3. "But, just in case: when you vote tomorrow, vote for the candidate most likely to hold the banks to account under law"

    I voted and I am pretty sure I voted for the candidates that "would have" wanted to hold banks and business' in general, more accountable under the law...but apparently America has voted otherwise...I will be watching this Congress very closely...

  4. The problem with attacking MERS on the fact that the notes are not recorded and the homeowners are not notified is that the courts are not on the same page and the rejecting courts make sense. See Cerantes v. Countrywide, No. 09-517 (D. Ariz. Sept 24, 2009) where the court rejected the MERS as a sham beneficiary because they were not receiving the payments and cannot obtain legal title. The court also added that "Any lack of notice in the public records however to future buyers of Pl's mortgage does alter the Pl's obligations." This point is key. Because once the original is found, now what? the homeowner can still not pay and the house is still upside down. Congress needs to pass a bill that if a bank or owner of a distressed asset received bail out then the distressed assets, aka notes on houses getting foreclosed, need to be modified to the market value now at a low interest rate. This will put the value of the assets at the true market value. The homeowner may have a chance at paying a lower mortgage at a reasonable interest rate and it is bssed on the true value of the property. by foreclosing the banks are doing a disservice to themselves. The proeprties get dilapitaed and sell for pennies. If the mortgages were modified to the market value, over a period of time, this will promote stability in the market. People have an avenue to keep their homes, save their credit and the banks receive the income stream of the lower mortgage being paid.

  5. It appears that we have now only seen the tip of the iceberg on the housing mortgage crisis. As if we hadn’t heard enough bad news, there was yesterday’s COB report expressing concern that the widespread consequences of flawed foreclosure documents and the extent of the impact on the nation’s major banks is yet unknown. “Robo-signing” of mortgage document leads to doubts about ownership. As the report stated, "clear and uncontested property rights are the foundation of the housing market . . .If these rights fall into question, that foundation could collapse."

    The consequences could be severe from single homeowner’s not able to easily ascertain to whom to send their mortgage check to banks underestimating the amount of bad loans they have on their balance sheets.

    I hate to be a pessimist, but I think the scenario is much worst that we could have predicted. Fraudulent documents turn the entire system on its head, not just our financial system but also our legal system. Involved in this mess, are not only mortgage service providers, but also attorneys. In South Florida I have equated foreclosure fraud with one firm in particular, David Sterns aka “South Florida’s #1 Foreclosure Mill”.

    It doesn’t take a genius to known that submitting fraudulent documents to the court in a foreclosure hearing is committing fraud on the court. Take for example, the case of U.S. Bank National Association, as Trustee, v. Harpster, from Florida Sixth Circuit Court, where the case was dismissed with prejudice. One reason for the prejudicial dismissal against the plaintiff by the court was based on the fact that the assignment of mortgage was created after the filing date of the action against the defendant and the “document date and notary date were purposely backdated by the plaintiff to a date prior to the filing of [the] foreclosure action.” The Court in this case found that plaintiff fraudulently backdated documents were created “in a purposeful, intentional effort to mislead the Defendant and this Court.” Guess who signed the assignment of mortgage? Cheryl Samons, an assistant secretary in David Stern’s law firm.

    One key issue in all of this, is the potential violation of a homeowner’s right to “due process.”
    With the backlog in foreclosures, judges were under pressure to keep apace. This “rocket docket” process was due to the impossibility of a court to sift through thousands of documents in each case. Unfortunately, judges placed too much faith and trust on these foreclosure mills.

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  7. I truly believe that MERS, lost notes, and abandonment of homeowner rights (via fraud as Katherine pointed out) will continue indefinitely until we are willing to vote for individuals which will hold banks accountable for their actions, instead of passing legislation which will continue to bail the megabanks out. I believe the blogger is correct:

    “For Congress to jump in and fix these deep-seated legal issues would require it to "bulldoze" on a wholesale basis longstanding state law from contracts to property to negotiable instruments. It would also shred the last semblance of the rule of law in our economy, and thereby doom the US to a second or third world economy.”

    We bankrupted the country fiscally by letting these megabanks run wild and now we are morally bankrupting this country if we let our representatives alter the law and allow banks to commit fraud.

  8. LaureenG (FIU)

    I must admit that I have missed the entire MERS episode. Are we to assume that this will work?

    How will a homeowner know who owns their mortgage and if the lein is satisfied if MERS has no contractual duty to do anything. It seems as though it's just another way to shift the blame around without consumers ever getting any assistance.

  9. Steven I agree that the cases have to work through the courts and the courts will have to go back to basics of contract and property law as well as statutory law. To comment on MERS, there is currently an investigation on them and David Stern. A class action suit was just filed in the Southern district court against MERS and its shareholders. The class consists of homeowners who lost their homes and challenges whether MERS had standing to foreclose when they are/were not the assignee on record, or the assignment was fraudulently purported after the actions of foreclosures were file. President of MERS, Stern, who is a foreclosure mill atty should be disbarred due to the conflict of interest.