Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

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.

Follow Ellen Brown on Twitter: www.twitter.com/ellenhbrown

Comments

[zrants]

The media spent countless hours investigating why we had the meltdown, who's to blame, and which regime is responsible for which part of the bailouts, yet they failed to turn up these findings by the Kansas Supreme Court regarding enforcement of foreclosures by third party owners of notes of interests.

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.

[JTyroler]

But, according to Sarah Palin, things would be just peachy if the government didn't regulate this. If I steal a couple hundred dollars from someone and am caught, I'm probably going to jail. If I'm on Wall Street or at a major bank and steal a couple hundred million, I probably get a nice bonus - at least until people start getting prosecuted for this massive theft of billions of dollars.

[bkay]

Another great article! So, what would be the sorrow if all homeowners got their homes scott free! The banks have already made a ton on the interest. If people did not have house payments, they would use their funds for other things, like consumption, recreation, travel. The banks would not get their monthly infusion of illegitimate funding, and fold, or become service agencies where people could save their funds, get a good return, and the banks could begin again loaning money...the same way they do now..maybe new owners..money does not care who owns 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!

[bkay]

Once again ellen brown sheds some light on a decision that could affect all homeowners. I am wondering if the reason obama wants everyone to refinance is to obviate something that a confluence of homeowners could use to get their homes free and clear. I am wondering if the right to foreclose is taken from "the banks," if this would be the case. And, if it were, would it be so bad. What would be the cost to the government of giving these folks, who have already no doubt paid in interest a great portion of what their house cost, a house! probably much less than we pay for a war that is both stupid and takes lives.
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

[DrKrbyLuv]

Thanks for another great article Ellen. I hope this legal action takes traction in other states.

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

[Ellen Brown - Huffpost Blogger]

Good thinking! This could also be done at the state level, with state-owned banks. States have huge amounts of capital which can be leveraged into roughly twenty times that sum in loans (with a 4% or 8% capital requirement, depending on risk weighting). A state-owned bank could scoop up mortgages in default and rent them back to the occupants until other terms could be renegotiated.

[mbaty]

I hope all the people with these mortgages get their houses free and clear. We don't need more people kicked out, we need to solve the "shelter" problem once and for all. Everyone deserves a home. Just like when settlers were given several acres of land, everyone should be given a house. We all need a place to stay. Money is no reason to take that away.

[rexx18]

lol whatever it is you do for a living...I hope you give it away for free and without payment. After all, everybody deserves your services for free.

[Ellen Brown - Huffpost Blogger]

I'd vote for publicly-issued credit used to purchase homes in foreclosure and rent them back to their occupants. Then the securities holders could be made whole as well, while avoiding this urban blight we have now where homes are being foreclosed, abandoned and occupied by drug dealers, etc.

[MunnyFarmOrg]

Can someone please explain how a simple "assignment of contract" clause does not make this decision void? What exactly is the supreme law? Hard to imagine that the mortgage writers' lawyers would not have that one in every mortgage.

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!

[Henry]

There is a related mortgage or deed of trust document that you fail to mention... and this portion of any well written home loan would appear to be the element that covers the lack of standing associated with MERS. That is the title policy. When you buy a house, the lender requires title insurance and it is the title insurance that is part of the closing documents that would establish the original lender as the mortgagee or beneficiary (under the deed of trust), eh?
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.

[DuganS1]

And banks shouldn't have to buy back their MBS at face value. Why should they? Can I force my broker to buy back some of the stocks I bought back in 2007 and 2008 at those values? And why should bankers go to prison? Most the deceptive lending practices were done by small mortgage lending houses that long ago went out of business. The large investment banks just bought the mortgages from those small lending companies, often repackaging and selling them to others. But considering they all kept large numbers of these assets themselves, it tells me that they were unaware of the deceptive lending practices (particularly those that were illegal) that were going on.

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.

[Ellen Brown - Huffpost Blogger]

If your broker engaged in fraud in selling the securities, you could go to court and get relief. I'm just pointing out what the law is. If the bankers sold toxic waste to investors with the pitch that it was triple A, they could wind up where Bernie Madoff is. Class actions HAVE been brought against the lenders, e.g. by the city of Newark for selling it inappropriate toxic CDOs. The attorney general handles those things.

[Henry]

Ellen,
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.

[DuganS1]

The cure for the economic ills of the United States is debt liquidation. We need Americans to liquidate their debt, or else households will be debt burdened and unable to spend for a decade or more to come ala Japan. Too much household income now goes directly to the financial services companies. We need large number of homeowners to foreclosure and liquidate their debt. Millions more need to rid themselves of credit card debt via bankruptcy. Only in this way will the debt be rid from the system, and only then can we start to build the economy again. Letting insolvent households keep their house simply prolongs the country's economic problems. It is bad for everyone. Let the weak holders get out of homes and get stronger holders in at lower prices. Let capitalism work, otherwise there will be no real economic recovery for a very long time.

[Ellen Brown - Huffpost Blogger]

There is a name for massive waves of foreclosures. It's called Depression. It doesn't solve anything. MERS is a fraud, which shields lenders engaging in predatory lending practices from lawsuits. Sixty million homeowners with a good legal defense to foreclosure, organized into a movement, could have the clout to make some serious changes in Congress.

[ScottontheSpot]

Yes, I've been wondering when these decisions would gain critical mass since I read about the first one in the Northeast in Business Week nearly two years ago. It's ridiculous that banks can divvy up a mortgage, resell it to several anonymous parties to spread the risk and get it off their books, then suddenly claim ownership of the loan when there's a default. It's possession 101 that you don't get to claim you own something once you've sold it to another. At most, the banks remain convenient middlemen.
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

[DuganS1]

We've already been seeing massive waves of foreclosures, and there are more waves to come (Alt-A and even prime in FL, CA, AZ, NV). This is healthy for the economy over the longer term. A large percentage of household income is going toward debt servicing (financial service companies). These folks can liquidate that debt via foreclosure, freeing up money to buy goods and services again. If they do not, they have little to no money to spend on goods and services and the US economy will be largely unable to grow. We need to rid the economy of the insolvent households. This will help families, as the debt burdened will be lifted -there is no debtors prison in the US- and they can in some years leverage up again, and it will put the burden on the banks. More banks be liquidated in the years to come as well. Some are technically insolvent now anyway. They just continue to hide bad assets off their balance sheets. The Obama administration even made it easier for banks to do so by modifying the mark to market rules.

[JereLHough]

DuganS1 says: "Let capitalism work". Tell that to the Wall Street banksters and Ponzi schemers who have hijacked our free market economy, along with out money.

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.

[DuganS1]

No one said eliminate all American debt. I'm talking about eliminating the debt of insolvent or hopelessly underwater households. If you don't allow debt levels to fall, you end up like Japan. The US economy will need get back to a normal healthy growth rate when so many of it's citizens are paying most their incomes toward debt, rather than purchasing goods. If you eliminate the debt of these households, it frees up purchasing power again and they can after a short period of time start to releverage.

[altohone]

OK.
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.

[Ellen Brown - Huffpost Blogger]

You put that so well!

[JereLHough]

Ellen, Another great service to our people.

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.

[Rodney Shakespeare]

Well done, Ellen. A while ago you pointed out the significance of the Deutsche Bank cases in Cleveland, Ohio (I think) and it seems that the situation is developing. Of course, as Jerel points out, Goldman Sachs and co will pressurize the Federal Courts but the overall situation is another fascinating indication of the complete corruption of the existing system

[tompoe]

Corporations hate it when a customer drops the state attorney general's name during disputes, or as a cc: at the end of a letter. This case decision is truly a godsend. I'm putting the case and your annotated comments, Ellen Brown, where they'll be at my fingertips. Finally, some Terrific news for us little people!

[EdwardUlyssesCate]

Well said, Ellen. We'll see if the Kansas judge will be overridden, or forced to change his verdict. There sure has been an awful lot of lyin' and stealin' going on these past few years. Like was said in the movie National Treasure, "Somebody has to go to jail." Let's hope it's not an innocent victim.

[Fourpoint]

Brown drops our jaws again. If this sticks, even if just in Kansas, all those entities engaged in the property business are going to be anxiously busy scrambling to find firewalls. Moreover, if it sticks in Kansas, no way it's not going to be boosted throughout the country. Big kudos to Brown for again pouring more grit on the slippery slopes of modern money management. Stay tuned to this issue and Brown for further developments. She does shine the light.

[GreatNews27]

Bankers hire lobbists. Lobbyists hire politicians. Politicians hire armies. Armies forclose on homeowners. American capitalism at it's best.

[JereLHough]

That describes what we have now fairly well. However, that's not "American Capitalism". That's "Monopoly Corporatism admixed with predatory capitalism". We haven't ever tried true "free market capitalism". The real question is will we? And if so when?