A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose -- on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.
Eliminating the "Straw Man" Shielding Lenders and Investors from Liability
The development of "electronic" mortgages managed by MERS went hand in hand with the "securitization" of mortgage loans -- chopping them into pieces and selling them off to investors. In the heyday of mortgage securitizations, before investors got wise to their risks, lenders would slice up loans, bundle them into "financial products" called "collateralized debt obligations" (CDOs), ostensibly insure them against default by wrapping them in derivatives called "credit default swaps," and sell them to pension funds, municipal funds, foreign investment funds, and so forth. There were many secured parties, and the pieces kept changing hands; but MERS supposedly kept track of all these changes electronically. MERS would register and record mortgage loans in its name, and it would bring foreclosure actions in its name. MERS not only facilitated the rapid turnover of mortgages and mortgage-backed securities, but it has served as a sort of "corporate shield" that protects investors from claims by borrowers concerning predatory lending practices. California attorney Timothy McCandless describes the problem like this:
[MERS] has reduced transparency in the mortgage market in two ways. First, consumers and their counsel can no longer turn to the public recording systems to learn the identity of the holder of their note. Today, county recording systems are increasingly full of one meaningless name, MERS, repeated over and over again. But more importantly, all across the country, MERS now brings foreclosure proceedings in its own name -- even though it is not the financial party in interest. This is problematic because MERS is not prepared for or equipped to provide responses to consumers' discovery requests with respect to predatory lending claims and defenses. In effect, the securitization conduit attempts to use a faceless and seemingly innocent proxy with no knowledge of predatory origination or servicing behavior to do the dirty work of seizing the consumer's home ... So imposing is this opaque corporate wall, that in a "vast" number of foreclosures, MERS actually succeeds in foreclosing without producing the original note -- the legal sine qua non of foreclosure -- much less documentation that could support predatory lending defenses.The real parties in interest concealed behind MERS have been made so faceless, however, that there is now no party with standing to foreclose. The Kansas Supreme Court stated that MERS' relationship "is more akin to that of a straw man than to a party possessing all the rights given a buyer." The court opined:
By statute, assignment of the mortgage carries with it the assignment of the debt ... Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust. [Citations omitted; emphasis added.]
MERS as straw man lacks standing to foreclose, but so does the original lender, although it was a signatory to the deal. The lender lacks standing because title had to pass to the secured parties for the arrangement to legally qualify as a "security." The lender has been paid in full and has no further legal interest in the claim. Only the securities holders have skin in the game; but they have no standing to foreclose, because they were not signatories to the original agreement. They cannot satisfy the basic requirement of contract law that a plaintiff suing on a written contract must produce a signed contract proving he is entitled to relief.
The Potential Impact of 60 Million Fatally Flawed Mortgages
The banks arranging these mortgage-backed securities have typically served as trustees for the investors. When the trustees could not present timely written proof of ownership entitling them to foreclose, they would in the past file "lost-note affidavits" with the court; and judges usually let these foreclosures proceed without objection. But in October 2007, an intrepid federal judge in Cleveland put a halt to the practice. U.S. District Court Judge Christopher Boyko ruled that Deutsche Bank had not filed the proper paperwork to establish its right to foreclose on fourteen homes it was suing to repossess as trustee. Judges in many other states then came out with similar rulings.
Following the Boyko decision, in December 2007 attorney Sean Olender suggested in an article in The San Francisco Chronicle that the real reason for the bailout schemes being proposed by then-Treasury Secretary Henry Paulson was not to keep strapped borrowers in their homes so much as to stave off a spate of lawsuits against the banks. Olender wrote:
The sole goal of the [bailout schemes] is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value -- right now almost 10 times their market worth. 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 catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. 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, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC . . . .What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back.
Needless to say, however, the banks did not buy back their toxic waste, and no bank officials went to jail. As Olender predicted, in the fall of 2008, massive taxpayer-funded bailouts of Fannie and Freddie were pushed through by Henry Paulson, whose former firm Goldman Sachs was an active player in creating CDOs when he was at its helm as CEO. Paulson also hastily engineered the $85 billion bailout of insurer American International Group (AIG), a major counterparty to Goldmans' massive holdings of CDOs. The insolvency of AIG was a huge crisis for Goldman, and Goldman was the largest recipient of public funds from the AIG bailout.
In a December 2007 New York Times article titled "The Long and Short of It at Goldman Sachs," Ben Stein wrote:
For decades now ... I have been receiving letters [warning] me about the dangers of a secret government running the world ... [T]he closest I have recently seen to such a world-running body would have to be a certain large investment bank, whose alums are routinely Treasury secretaries, high advisers to presidents, and occasionally a governor or United States senator.
The pirates seem to have captured the ship, and until now there has been no one to stop them. But 60 million mortgages with fatal defects in title could give aggrieved homeowners and securities holders the crowbar they need to exert some serious leverage on Congress -- serious enough perhaps even to pry the legislature loose from the powerful banking lobbies that now hold it in thrall.
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The court held that in order to foreclose a property the statutes require the holder of the deed of trust to also hold the note, or prove an agency relationship exists between the holder of the deed and the holder of the note. The lack of transparency of ownership precludes the right to foreclose.
"...Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust... [Citations omitted from excerpt.]"
Thank you Ellen for bringing this to our attention. Hopefully someone in the mainstream media will pick this up and cover it.
I wish everyone reading ellen's well researched articles would post the link to their web of friends. She can only do so much. We can help spread the light.
bkay
thank you, ellen, you are a national treasure!
Ellen is doing the work of 10 activists, and I hope those reading this will at least put the link on their facebook page, and sign up to facebook if they haven't already. The individual community of one's friends can help spread this information.
Until people wise up that no matter how hard they work, if they do not understand the basics of our financial system, they will always be the servant of debt. There is a reason that real economics is not taught...keep people ignorant and slaves.
Help by getting involved...read ellen's book webofdebt and her many articles. And share the information.
And give ellen a virtua hug...she is only one person, doing the work of many for all of us.
Thank you, ellen. Thanks a heap!
bkay
When the mortgage crisis hit, we should have allowed Frannie, Freddie, etc. to go under. Then, the mortgages could have been bought at fair market value - by the U.S.
At the end of 2007, total mortgages were around $14.5 trillion (home, multifamily residential, commercial and farm mortgages). So, maybe we end paying $10 trillion. The money could be issued in U.S. notes (greenbacks), directly through the treasury and free from any interest or principal debt. Mortgage holders could be given a low rate, for example 1%.
The mortgage holders would pay the loans back to the American people which would become a huge cash-stream to lower taxes. Part of the 1% interest charge could be used to pay banks and other lending institutions to qualify borrowers, help collect the payments, handle the closing, etc., instead of adding a separate government agency.
If we are going to "monetize" debt solely backed by the people and property of the United States, why would we borrow our own money? Instead of issuing ruinous debt, we should be issuing money that would benefit the people.
Larry
If the intermitent windshield wiper case took that many years to get through the courts, just imagine how much money and delays the banksters legal teams will pour into this one! The court of Public Opinion enlightenment may help...
If someone has access to PBS, ...Bill Moyers had a great article on avoiding eviction AFTER foreclosures, so this would probably get some airtime! Seems like something Steve Kroft from 60 minutes would love to do too!
Thanks for another great article Ellen!
Once the note goes through the securitization slicing sausage machine to be domiciled in several different security issues the mortgage or deed of trust linkage does not follow and oops there is the problem . But, without doubt, the initial title policy paid for by the obligor would establish title and state lienholder. There are many a lawyer who will carry this confusion about "standing" into boring, the ugly, and the beyond recognition.
About Fannie and Freddie, they had to be bailed out. It had nothing to do with the fact that Paulson used to work at Goldman, or that he was around in the early stages of MBS and CDOs. Without Fannie and Freddie, there is no mortgage market and thus no chance for a housing recovery. The collapse of AIG was a crisis for nearly ever bank globally. Goldman and some large European banks, in particular, were to a significant degree using credit default swaps from AIG (as the counter-party) to hedge against their MBS. If you wiped out those hedges, you wipe out Goldman and some major European banks, and you are a big step closer to global depression.
Why would you state that the banker's pitched the triple AAA??? Weren't S&P, Moodys, and Fitch some big time ratings agencies who provided this category? You're not saying that "they" (the ratings agencies) were in on this now are you? And then you have apparisers, is it possible that the continual increase in value led to "comparables" that continued a cycle that would not stop until the "pop"? The disaggregatged insanity of specialization in components sent to some highly paid, well educated kids in the big city. Ouch.
As probably the only person in the country who asked his lawyer to object to the provision in my loan agreement that allowed my bank to resell my loan to other parties (which, my lawyer said I had no right to do, even though I still believe the borrower has as much right to choose the lender - and have his choice STAY chosen - as the lender has the right to choose the borrower), I can relate. I hate debt & have since paid off my mortgage, but that doesn't change the fact that securitization violates basic tenets of the lender-borrower relationship. Borrowers have a right to deal with a single lender with clear title, who will not resell his loan to an unknown third party whose motives and procedures may not reflect the original lender's.
In the present case, it's a matter of title possession, and the bank didn't have it. Maybe this will finally gut the wrongful practice
If you really understood our private money creation system you'd know that elimination all American debt would also eliminate all American money.
The ONLY cure for our economic ills is monetary reform, transparency, open accounting, and transferring money creation and regulation back under sovereign public controls.
Lacking that, there is ONLY deep depression as far as the eye can see.
So they stole millions of houses by suckering people into loans designed to become unaffordable, but now they can't prove they own the houses they stole?
Too funny.
Count my vote as one more for jailin the whole lot.
Your article brings the hope of this decision being a lever for the correction of grave injustices in our money and banking system. Your excellent book, Web of Debt illuminates these monetary wrongs and the urgent need to fix them while we still can, if we still can.
My main question is will it survive the Federal Courts up through the Supreme Court of the US? There is going to be tremendous pressure brought by Goldman Sachs, JP Morgan-Chase, Morgan Stanley, Bank of America and other "TBTF" money powers to overturn this decision.
This could be another sound argument for a state-owned public banking system that could issue money (in the form of tax credits or other state-backed IOU's) that could help fund public works, roads, bridges, libraries, schools, etc in lieu of taxes. Of course the national gov't could be doing the same thing, rather than borrowing all of our money at usurious rates of interest. This current money scheme only further enriches Wall Street and the international bankers who own the Federal Reserve System, and must be changed via legislation like the American Monetary Act or similar bills.
Thanks for spotlighting this important Kansas Supreme Court decision.