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L. Randall Wray

L. Randall Wray

Posted: January 24, 2011 09:01 AM

It is now widely recognized that MERS facilitated fraud by lenders, servicers, foreclosers and securitizers. Even on the most charitable interpretation it is very difficult to believe that MERS was not fraudulent by design. So much of the story has already been told that we do not need to rehash all of it here. Let me first concisely summarize the two main problems, and then move on to the most recent developments that put the final nails in MERS's coffin. I'll conclude with my argument that there really was some "not so intelligent" design behind all of this. But it is coming back to bite the hand that feeds. The big banks will not survive the monster they created.

Whenever those who are critical of MERS and the banksters post blogs about the multiple frauds, we are attacked by commentators -- presumably industry hacks -- who try to obfuscate the issues. But recent court cases as well as testimonies before elected representatives confirm our two main claims. First, many or most foreclosures that are taking place are illegal because those doing the foreclosing do not have legal standing. And, second, the practices that created the foreclosure problems also mean that the mortgage backed securities are actually unsecured debt. That means banks must take them back, so they are toast. It all comes back to MERS's business model: it destroyed the chain of title.

Much of the rest of the fraud and scandal we are witnessing follows on from that because the banks want to foreclose the properties before the securities holders put back the fraudulent securities. The problem is that the destruction of the clear chain of title makes it impossible to foreclose, so the banks used robo-signers to forge documents in the hope they could paper over their home thefts. But homeowners, courts, legislators, securities investors, and title insurers have caught on to the scam. In addition to the forgeries, MERS and bank officials and lawyers are committing perjury in court in the hope that they can confuse the issues sufficiently that they can complete the home thefts.

However, improper foreclosures produce houses that cannot be sold legally -- so the can is just kicked down the road to the next crisis, which will reveal that those who have purchased foreclosed homes have no legal title to them. And so their debts will also be unsecured. MERS has created a disaster that will not be resolved for at least a decade, perhaps a generation. Given the scale of foreclosures (projected at 13 million by 2012), future home purchasers face a pretty good chance that if they are buying pre-owned housing, their title to the property is dubious.

Let us quickly review recent developments.

Notice of Default Robo-Signing. About half the states are "nonjudicial states" (including California, Nevada, and Arizona -- important states so far as the foreclosure crisis goes). As Kate Berry writing for the American Banker argues, the foreclosure process in these states begins with a formal "notice of default" (NOD) letter sent to the delinquent homeowner; this is followed up by a notice published in a local newspaper. The NOD is supposed to be signed by an agent of the "party of interest"--the company with legal standing to foreclosed. By signing the letter, that agent certifies that she has reviewed the relevant documents to determine, most importantly, that the homeowner had defaulted on payments and that the company for which she is acting as agent really does have standing to foreclose. But in practice, these letters are Robo-signed by people who never look at documents. They do not even seem to know for whom they are acting as agent!

For example, in the Nevada case studied by Berry, Stanley Silva (a title officer at a title firm) gave a deposition asserting that he never reviewed documents before signing NOD letters. Further, he said he was acting "on behalf of Ticor Title of Nevada, who is agent for LPS title, who is agent for National Default Servicing" who is "apparently" agent for Fidelity National, which is "apparently" a servicer for Wilshire, which acted as agent for Wells Fargo, which claimed to have standing to foreclose! Now that is a nice "daisy chain" that successfully hides the party of interest from the homeowner trying to avoid foreclosure! Lawyer Walter Hackett, who is handling a number of such cases, says "A huge percentage of notices of default and notices of trustee sales are legally questionable and probably void." Since foreclosures in these nonjudicial states do not have to go through the courts, it is probable that abuses are common -- and hard to expose because homeowners have to file a lawsuit to get to a judge. Heck, the homeowner would need a sleuth better than Sherlock Holmes to find out who holds the interest in the mortgage.

Improper foreclosures and fees imposed on active military personnel. JPMorgan-Chase was caught stealing homes from military personnel. The bank admitted 14 improper foreclosures. It is illegal to foreclose on active duty personnel--and who knows how many other cases there are that JPMorgan and the other fraudster banks have not yet acknowledged. The bank also admitted that it overcharged 4000 active duty personnel--jacking up their mortgage interest rates to 9 or 10 percent even though those serving our country are supposed to get 6% rates. The bank now says it feels their pain -- "we feel particularly badly about the mistakes we made here" said bank officials in a statement. But routine overcharges are the business model at the big banks. Then they pile on late fees when families cannot afford the overcharges -- the overcharges ensure that homeowners cannot possibly catch up (that is the purpose of the late fees -- the banks simply want to speed foreclosure). Finally, the fraudsters take the homes and throw the owners out onto the streets. When caught, the bank says it is sorry and promises it will do better in the future. Now, it is perfectly plausible that this horrendous treatment of those serving our country resulted from incompetence, not fraud. But as my colleague Bill Black says, these are banks -- they are suppposed to be able to process paperwork without error! Yet, they have officials who are signing foreclosure documents, asserting they have looked over all relevant docs. Clearly, they did not. At best they are certifiably incompetent; more likely they are certifiably criminal.

Freddie and Fannie force securities "put backs". Bank of America agreed to settle with Freddie and Fannie for $127 billion securities sold by Countrywide (taken over by BofA) that they claimed to be faulty. The problem was that the underlying mortgages did not meet the "reps and warranties" the bank had provided. BofA paid Freddie $1.28 billion and Fannie $1.52 billion -- a measly 2+% of the value of the fraudulent mortgages the bank sold. Four Democratic members of Congress rightly objected -- how could this settlement represent "the best possible recovery of funds available to taxpayers"? Obviously, it cannot. It is just more subsidizing of Wall Street using Uncle Sam's funds. Meanwhile, Freddie posted 5 straight quarters of losses, receiving $63 billion in aid from the Treasury to cover its bad deals with banks like BofA. Apparently the deal with BofA was pushed through by Treasury Secretary Geithner, who continues to protect Wall Street's "SDIs" (systemically dangerous institutions, as Bill Black puts it). But as Yogi said, it ain't over until it's over. BofA will be sued again and again over fraudulent mortgages. The problem is not just the "reps and warranties"--an even bigger problem is that the securities are not backed by mortgages.

Citi still sells trashy mortgages. A recent audit disclosed that 15% of the mortgages Citi sold to Freddie in 2010 were frauds. These are not old mortgages originated during the boom, rather these were all new originations, underwritten between February and May of 2010. The loans are rated "not acceptable quality" because they are missing documents, the properties were not properly appraised, the incomes of homebuyers did not meet requirements, and the homes did not qualify. In other words, they had the same litany of problems that all the junk mortgages had back in 2005. Citi has learned no lessons from the fiasco it helped to created. Indeed, Sanjiv Das, CEO of CitiMortgage (that originates loans for Citi) bragged that with "only" a 15% rate of fraudulent mortgages, that qualifies as "one of the most outstanding stories" of Citi's business model--a "fantastic job" he claimed. True, it is down from a 30% fraud rate in the fourth quarter of 2009. But 15%? Sold to government? What kind of confidence can that build in the minds of investors, homebuyers, regulators, or legislators? Yes, the SDIs are still dangerous and only insane public policy would keep them open to permit them to continue to perpetrate fraud. As in the BofA case, this is a "reps and warranties" problem, not directly related to MERS but it does help us to understand why the banks should be shut down along with MERS.