Over 62 million mortgages are now held in the name of MERS, an electronic recording system devised by and for the convenience of the mortgage industry. A California bankruptcy court, following landmark cases in other jurisdictions, recently held that this electronic shortcut makes it impossible for banks to establish their ownership of property titles--and therefore to foreclose on mortgaged properties. The logical result could be 62 million homes that are foreclosure-proof.
Mortgages bundled into securities were a favorite investment of speculators at the height of the financial bubble leading up to the crash of 2008. The securities changed hands frequently, and the companies profiting from mortgage payments were often not the same parties that negotiated the loans. At the heart of this disconnect was the Mortgage Electronic Registration System, or MERS, a company that serves as the mortgagee of record for lenders, allowing properties to change hands without the necessity of recording each transfer.
MERS was convenient for the mortgage industry, but courts are now questioning the impact of all of this financial juggling when it comes to mortgage ownership. To foreclose on real property, the plaintiff must be able to establish the chain of title entitling it to relief. But MERS has acknowledged, and recent cases have held, that MERS is a mere "nominee"--an entity appointed by the true owner simply for the purpose of holding property in order to facilitate transactions. Recent court opinions stress that this defect is not just a procedural but is a substantive failure, one that is fatal to the plaintiff's legal ability to foreclose.
That means hordes of victims of predatory lending could end up owning their homes free and clear -- while the financial industry could end up skewered on its own sword.
California Precedent
The latest of these court decisions came down in California on May 20, 2010, in a bankruptcy case called In re Walker, Case no. 10-21656-E-11. The court held that MERS could not foreclose because it was a mere nominee; and that as a result, plaintiff Citibank could not collect on its claim. The judge opined:
Since no evidence of MERS' ownership of the underlying note has been offered, and other courts have concluded that MERS does not own the underlying notes, this court is convinced that MERS had no interest it could transfer to Citibank. Since MERS did not own the underlying note, it could not transfer the beneficial interest of the Deed of Trust to another.Any attempt to transfer the beneficial interest of a trust deed without ownership of the underlying note is void under California law.
In support, the judge cited In Re Vargas (California Bankruptcy Court); Landmark v. Kesler (Kansas Supreme Court); LaSalle Bank v. Lamy (a New York case); and In Re Foreclosure Cases (the "Boyko" decision from Ohio Federal Court). (For more on these earlier cases, see here, here and here.) The court concluded:
Since the claimant, Citibank, has not established that it is the owner of the promissory note secured by the trust deed, Citibank is unable to assert a claim for payment in this case.The broad impact the case could have on California foreclosures is suggested by attorney Jeff Barnes, who writes:
This opinion . . . serves as a legal basis to challenge any foreclosure in California based on a MERS assignment; to seek to void any MERS assignment of the Deed of Trust or the note to a third party for purposes of foreclosure; and should be sufficient for a borrower to not only obtain a TRO [temporary restraining order] against a Trustee's Sale, but also a Preliminary Injunction barring any sale pending any litigation filed by the borrower challenging a foreclosure based on a MERS assignment. While not binding on courts in other jurisdictions, the ruling could serve as persuasive precedent there as well, because the court cited non-bankruptcy cases related to the lack of authority of MERS, and because the opinion is consistent with prior rulings in Idaho and Nevada Bankruptcy courts on the same issue.
What Could This Mean for Homeowners?
Earlier cases focused on the inability of MERS to produce a promissory note or assignment establishing that it was entitled to relief, but most courts have considered this a mere procedural defect and continue to look the other way on MERS' technical lack of standing to sue. The more recent cases, however, are looking at something more serious. If MERS is not the title holder of properties held in its name, the chain of title has been broken, and no one may have standing to sue. In MERS v. Nebraska Department of Banking and Finance, MERS insisted that it had no actionable interest in title, and the court agreed.
An August 2010 article in Mother Jones titled "Fannie and Freddie's Foreclosure Barons" exposes a widespread practice of "foreclosure mills" in backdating assignments after foreclosures have been filed. Not only is this perjury, a prosecutable offense, but if MERS was never the title holder, there is nothing to assign. The defaulting homeowners could wind up with free and clear title.
In Jacksonville, Florida, legal aid attorney April Charney has been using the missing-note argument ever since she first identified that weakness in the lenders' case in 2004. Five years later, she says, some of the homeowners she's helped are still in their homes. According to a Huffington Post article titled "'Produce the Note' Movement Helps Stall Foreclosures":
Because of the missing ownership documentation, Charney is now starting to file quiet title actions, hoping to get her homeowner clients full title to their homes (a quiet title action 'quiets' all other claims). Charney says she's helped thousands of homeowners delay or prevent foreclosure, and trained thousands of lawyers across the country on how to protect homeowners and battle in court.Criminal Charges?
Other suits go beyond merely challenging title to alleging criminal activity. On July 26, 2010, a class action was filed in Florida seeking relief against MERS and an associated legal firm for racketeering and mail fraud. It alleges that the defendants used "the artifice of MERS to sabotage the judicial process to the detriment of borrowers;" that "to perpetuate the scheme, MERS was and is used in a way so that the average consumer, or even legal professional, can never determine who or what was or is ultimately receiving the benefits of any mortgage payments;" that the scheme depended on "the MERS artifice and the ability to generate any necessary 'assignment' which flowed from it;" and that "by engaging in a pattern of racketeering activity, specifically 'mail or wire fraud,' the Defendants . . . participated in a criminal enterprise affecting interstate commerce."
Local governments deprived of filing fees may also be getting into the act, at least through representatives suing on their behalf. Qui tam actions allow for a private party or "whistle blower" to bring suit on behalf of the government for a past or present fraud on it. In State of California ex rel. Barrett R. Bates, filed May 10, 2010, the plaintiff qui tam sued on behalf of a long list of local governments in California against MERS and a number of lenders, including Bank of America, JPMorgan Chase and Wells Fargo, for "wrongfully bypass[ing] the counties' recording requirements; divest[ing] the borrowers of the right to know who owned the promissory note . . .; and record[ing] false documents to initiate and pursue non-judicial foreclosures, and to otherwise decrease or avoid payment of fees to the Counties and the Cities where the real estate is located." The complaint notes that "MERS claims to have 'saved' at least $2.4 billion dollars in recording costs," meaning it has helped avoid billions of dollars in fees otherwise accruing to local governments. The plaintiff sues for treble damages for all recording fees not paid during the past ten years, and for civil penalties of between $5,000 and $10,000 for each unpaid or underpaid recording fee and each false document recorded during that period, potentially a hefty sum. Similar suits have been filed by the same plaintiff qui tam in Nevada and Tennessee.
By Their Own Sword: MERS' Role in the Financial Crisis
MERS is, according to its website, "an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans." Or as Karl Denninger puts it, "MERS' own website claims that it exists for the purpose of circumventing assignments and documenting ownership!"
MERS was developed in the early 1990s by a number of financial entities, including Bank of America, Countrywide, Fannie Mae, and Freddie Mac, allegedly to allow consumers to pay less for mortgage loans. That did not actually happen, but what MERS did allow was the securitization and shuffling around of mortgages behind a veil of anonymity. The result was not only to cheat local governments out of their recording fees but to defeat the purpose of the recording laws, which was to guarantee purchasers clean title. Worse, MERS facilitated an explosion of predatory lending in which lenders could not be held to account because they could not be identified, either by the preyed-upon borrowers or by the investors seduced into buying bundles of worthless mortgages. As alleged in a Nevada class action called Lopez vs. Executive Trustee Services, et al.:
Before MERS, it would not have been possible for mortgages with no market value . . . to be sold at a profit or collateralized and sold as mortgage-backed securities. Before MERS, it would not have been possible for the Defendant banks and AIG to conceal from government regulators the extent of risk of financial losses those entities faced from the predatory origination of residential loans and the fraudulent re-sale and securitization of those otherwise non-marketable loans. Before MERS, the actual beneficiary of every Deed of Trust on every parcel in the United States and the State of Nevada could be readily ascertained by merely reviewing the public records at the local recorder's office where documents reflecting any ownership interest in real property are kept....
After MERS, . . . the servicing rights were transferred after the origination of the loan to an entity so large that communication with the servicer became difficult if not impossible .... The servicer was interested in only one thing - making a profit from the foreclosure of the borrower's residence - so that the entire predatory cycle of fraudulent origination, resale, and securitization of yet another predatory loan could occur again. This is the legacy of MERS, and the entire scheme was predicated upon the fraudulent designation of MERS as the 'beneficiary' under millions of deeds of trust in Nevada and other states.
Axing the Bankers' Money Tree
If courts overwhelmed with foreclosures decide to take up the cause, the result could be millions of struggling homeowners with the banks off their backs, and millions of homes no longer on the books of some too-big-to-fail banks. Without those assets, the banks could again be looking at bankruptcy. As was pointed out in a San Francisco Chronicle article by attorney Sean Olender following the October 2007 Boyko [pdf] decision:
The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.. . . The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail . . . .
The Swedish banks were largely privatized again when they got back on their feet, but it might be a good idea to keep some banks as publicly-owned entities, on the model of the Commonwealth Bank of Australia. For most of the 20th century it served as a "people's bank," making low interest loans to consumers and businesses through branches all over the country.
With the strengthened position of Wall Street following the 2008 bailout and the tepid 2010 banking reform bill, the U.S. is far from nationalizing its mega-banks now. But a committed homeowner movement to tear off the predatory mask called MERS could yet turn the tide. While courts are not likely to let 62 million homeowners off scot-free, the defect in title created by MERS could give them significant new leverage at the bargaining table.
Originally published in Yes! Magazine.
Follow Ellen Brown on Twitter: www.twitter.com/ellenhbrown
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http://livinglies.wordpress.com/2010/08/20/62-million-homes-are-legally-foreclosure-proof/
He says the property could not be foreclosed, but that doesn't mean the buyers don't still owe the money. It DOES mean that the bank would have to file a lawsuit to get the money, not just do a non-judicial foreclosure sale as in CA at present. So the buyers could raise defenses such as predatory lending and fraud, and the bank would be way more likely to do a workout of some sort. Also, the bank couldn't recover more money than the property was worth. Sounds fair!
Plus, foreclosure mills work in concert with Wells Fargo. Among other things, Wells Fargo has tax advantage from fraudulent foreclosure proceedings after placing distressed homeowners’ names / social security numbers on false IRS (acquisition) form 1099-A’s, even when no lawful “acquisition” of properties occurred; such homeowners wrongfully become forced to explain these turn of events to the IRS after surprise receipts of tax bills... . .**SEE this entire @ http://www.lawgrace.org/2010/08/14/foreclosure-mills-judicial-fraud-consumer-exploitation-government-shams/
Get on living lies dot word press dot com and do an advanced Google search with Dave Krieger in the "all these words" line. He is wonderful.
Let this bring those greedy Wall Street criminals to their knees.
Often MERS is also the asignee by recorded assignment. To insure the correct paper trail is followed, the entire loan package including the note should be sent to the new mortgage holder with the assignment. Sometimes the documents are not forwarded which can invalidate or prevent foreclosure temporarily. Once the documents are located, the action goes forward.
The issue of backdating assignments should not be the problem it has become if judges follow the letter of the law. All the judge has to do is determine that the foreclosing lender provides copies of recorded assignments clearly showing the chain of ownership of the mortgage. The day and time a document is recorded takes precedent over any date a document is purported to be signed.
Before I write title insurance on any foreclosed property, I make sure all assignments have been properly recorded prior to the foreclosure filing, the foreclosure file includes copies of the note as well as the mortgage, and proof of service for all actions to all parties is included in the file. It profits a lender very little to have a property on which they cannot get title insurance.
As the real estate market got busier, lenders were overwhelmed. Most of the paper was pushed by low level employees whose pay was at the secretarial/assistant level and who had no incentive to aim for perfection on very tight deadlines. This would be why you are seeing such difficulty in getting modifications now. There is almost not enough money in the world to motivate lenders to hire the numbers of customer service representatives required to adequately help borrowers who need to modify or re-finance.
Almost every error on the lender's part can be corrected, eventually, through a process called title clearing or document perfection. This is also something I do. Sometimes a re-foreclosure is required. The numbers of borrowers who might actually be able to get clear title to their property without paying off their mortgage is miniscule.
I would like to see how many voided mortgages withstand a lender's appeal.
What is assigned is the entire loan. The note and the mortgage/trust deed are part of the same loan and cannot be assigned separately. I have never seen an instance where different entities held the note and mortgage/trust deed.
a small crack in the wall. let us all look for others. i want to live in one of the big houses that was formerly occupied by a purveyor of CDS paper. i will turn it in to a community shelter and garden, open to all who need a place to live, free of the jerk off paper pushers.
we will turn the mercedes into a taxi.
when someone dies (death certificate)
when someone marries (marriage license)
when you buy or sell property (probate)
when you incorporate (articles of incorporation)
This stuff is supposed to be on record, available to public inspection.
MERS did circumvent required procedure.
Wikipedia has a bunch Federal Courts and State supreme courts all lining up on MERS Side as having properly documented and assigned titles, so this pipe dream of free homes for all is not going to last long.
Flip side of Wiki:
MERS v. Southwest Homes of Arkansas Supreme Court of Arkansas March 2009
Bellistri v. Ocwen – Missouri Court of Appeals March 2009
LaSalle Bank v. Michael Lamy, Joan Lamy SUPREME COURT OF NEW YORK, SUFFOLK COUNTY
Mortgage Elec. Registration Sys., Inc. v. Johnston, Rutland, Vermont Superior Court
Mortgage Electronic Registration System v. Saunders Maine Supreme Judicial Court - Aug 12, 2010
I have five PAGES of opinions that all went sidewards for MERS. You mentioned cherry-picking in earlier comments The Wiki page you cite is a perfect example.
It's not a case of the borrower trying to get a FREE house. It's a case of an entity trying to collect on the debt, i.e. foreclose, who has no legal standing to do so. Kind of like if I knocked on your door one day and said that you needed to start making your mortgage payments to ME.
Out of curiosity, Paul, lawyer, mortgage broker or trader?
Times will be difficult but the outcome will be the emergence of an economy facilitated by an honest medium of exchange and not by the credit-based money that we presently have, which benefits a legally privileged financial elite to the near exclusion of productive citizens and entrepeneurs.
We should not be indentured servants to a pampered and politically-empowered elite that controls the issuance of our money supply. Not to worry, the country has gone off a paper standard administered by a central bank before and recovery was rapid. Even before that, In the early colonial times, a serious hyperinflation was corrected within a year and a vibrant and solid market emerged relatively quickly.
The crooks deserve to get skewered on their own securitized mortgage sword. "what MERS did allow was the securitization and shuffling around of mortgages behind a veil of anonymity...
Nationalization of these giant banks might be the next logical step--a step that some commentators said should have been taken in the first place." amen Ellen Brown