47471019 Mers Huffing Ton Post 1-24-11 Randal Wray Editorial on Mers

8/7/2019 47471019 Mers Huffing Ton Post 1-24-11 Randal Wray Editorial on Mers

http://slidepdf.com/reader/full/47471019-mers-huffing-ton-post-1-24-11-randal-wray-editorial-on-mers 1/6

This is the print preview: Back to normal view »

January 24, 2011

2.7%30 Yr Mortgage Rate $160,000 Mortgage for $434/mo Get Your Low Refinance Rate Now! MortgageRates.Free

Mortgage Rate at 2.90%$200,000 home mortgage for $771/mo. See New Payment. No SSN Required. Mortgage.L

Short Sale for No Cost Avoid foreclosure. Click to Qualify Call today! Free consultation. www.socalshortsale.org

L. Randall Wray

Professor of Economics and Research Director of the Center for Full Employment and Price Stability,University of Missouri–Kansas City

Posted: January 24, 2011 09:01 AM

Requiem for MERS (and the Banks That Createdthe Frankenstein Monster)

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 notfraudulent by design. So much of the story has already been told that we do not need to rehash all of ithere. Let me first concisely summarize the two main problems, and then move on to the most recentdevelopments that put the final nails in MERS's coffin. I'll conclude with my argument that there reallywas 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, weare attacked by commentators -- presumably industry hacks -- who try to obfuscate the issues. Butrecent 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 alsomean that the mortgage backed securities are actually unsecured debt. That means banks must takethem back, so they are toast. It all comes back to MERS's business model: it destroyed the chain oftitle.

Much of the rest of the fraud and scandal we are witnessing follows on from that because the bankswant to foreclose the properties before the securities holders put back the fraudulent securities. Theproblem is that the destruction of the clear chain of title makes it impossible to foreclose, so the banksused robo-signers to forge documents in the hope they could paper over their home thefts. Buthomeowners, courts, legislators, securities investors, and title insurers have caught on to the scam. Inaddition to the forgeries, MERS and bank officials and lawyers are committing perjury in court in the

1/24/2011 L. Randall Wray: Requiem for MERS (and…

huffingtonpost.com/…/requiem-for-mer… 1



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 kickeddown the road to the next crisis, which will reveal that those who have purchased foreclosed homeshave no legal title to them. And so their debts will also be unsecured. MERS has created a disasterthat 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 arebuying 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 ofdefault" (NOD) letter sent to the delinquent homeowner; this is followed up by a notice published in alocal newspaper. The NOD is supposed to be signed by an agent of the "party of interest"--thecompany with legal standing to foreclosed. By signing the letter, that agent certifies that she hasreviewed the relevant documents to determine, most importantly, that the homeowner had defaulted onpayments 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. Theydo 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 adeposition asserting that he never reviewed documents before signing NOD letters. Further, he said hewas acting "on behalf of Ticor Title of Nevada, who is agent for LPS title, who is agent for NationalDefault Servicing" who is "apparently" agent for Fidelity National, which is "apparently" a servicer forWilshire, which acted as agent for Wells Fargo, which claimed to have standing to foreclose! Now thatis a nice "daisy chain" that successfully hides the party of interest from the homeowner trying to avoidforeclosure! Lawyer Walter Hackett, who is handling a number of such cases, says "A hugepercentage 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 probablethat abuses are common -- and hard to expose because homeowners have to file a lawsuit to get to ajudge. Heck, the homeowner would need a sleuth better than Sherlock Holmes to find out who holds theinterest 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 illegalto foreclose on active duty personnel--and who knows how many other cases there are that JPMorganand the other fraudster banks have not yet acknowledged. The bank also admitted that it overcharged4000 active duty personnel--jacking up their mortgage interest rates to 9 or 10 percent even thoughthose 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 routineovercharges are the business model at the big banks. Then they pile on late fees when families cannotafford the overcharges -- the overcharges ensure that homeowners cannot possibly catch up (that is thepurpose of the late fees -- the banks simply want to speed foreclosure). Finally, the fraudsters take thehomes and throw the owners out onto the streets. When caught, the bank says it is sorry and promisesit will do better in the future. Now, it is perfectly plausible that this horrendous treatment of those servingour country resulted from incompetence, not fraud. But as my colleague Bill Black says, these arebanks -- they are suppposed to be able to process paperwork without error! Yet, they have officialswho are signing foreclosure documents, asserting they have looked over all relevant docs. Clearly, theydid 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 befaulty. The problem was that the underlying mortgages did not meet the "reps and warranties" the bankhad provided. BofA paid Freddie $1.28 billion and Fannie $1.52 billion -- a measly 2+% of the value ofthe fraudulent mortgages the bank sold. Four Democratic members of Congress rightly objected -- howcould 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 posted5 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 fraudulentmortgages. The problem is not just the "reps and warranties"--an even bigger problem is that thesecurities 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 thesewere all new originations, underwritten between February and May of 2010. The loans are rated "notacceptable 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 nolessons from the fiasco it helped to created. Indeed, Sanjiv Das, CEO of CitiMortgage (that originatesloans for Citi) bragged that with "only" a 15% rate of fraudulent mortgages, that qualifies as "one of themost outstanding stories" of Citi's business model--a "fantastic job" he claimed. True, it is down from a30% fraud rate in the fourth quarter of 2009. But 15%? Sold to government? What kind of confidencecan that build in the minds of investors, homebuyers, regulators, or legislators? Yes, the SDIs are stilldangerous and only insane public policy would keep them open to permit them to continue toperpetrate fraud. As in the BofA case, this is a "reps and warranties" problem, not directly related toMERS but it does help us to understand why the banks should be shut down along with MERS.

Ibanez decision in Massachusetts. Courts continue to chip away at the arguments made by banks

and their Frankenstein creation, MERS, to justify foreclosure without proper documentation. MERSwas manufactured by the industry to evade proper recording of property sales in county recorder'soffices. This not only cheated the recorders out of fees and Uncle Sam out of federal taxes, but it alsobroke the chain of title. The fiction perpetrated by MERS is that it is simultaneously a nominee of thetrue owner of the mortgage debt and at the same time it is the beneficiary of the security instrument.(You cannot simultaneously be the party of interest and the nominee, of course.) It also disclaims anyfinancial interest in the mortgage and has no claim on the mortgage payments. But it claims that it canoperate as the agent of unnamed owners of the mortgage instrument, unknown owners who--since theyare unknown -- have never designated MERS as agent. The Massachusetts Supreme Court ruleddecisively against MERS's claims, and a growing number of other state supreme courts (Nevada, NewYork, Kansas, Idaho) have agreed that MERS is only a nominee or "straw man" (as Kansas put it) withno standing to foreclose.

Here's the problem. MERS was supposed to replace the old fashioned method that relied on physicaldocs with a newfangled electronic registry. When a homebuyer takes out a mortgage there are twoessential pieces--the promissory note and the "security", "deed" or "mortgage". The first commits thehomeowner to payments, the second is a lien on the property that entitles the holder to foreclose in thecase of default. The note is held by the lender and the mortgage is recorded at the county recorder's





office. In US law, the "mortgage follows the note"--the note holder who has the mortgage can forecloseif the payments are not made--keeping them together ensures that the one who is owed can seize theproperty and sell it to recover monies owed. It also protects the borrower--you cannot have multipleparties claiming an interest in the property. But MERS separated them--indeed, i t argued that itselectronic registry replaced the need for a note. (In Florida the notes were routinely destroyed--and thismight have been a practice that was followed elsewhere, which is why there are so many "lost noteaffidavits".)

And as now widely recognized, when the mortgage was packaged into a security and resold multipletimes, it was not properly assigned to the new owner. MERS's theory was that it would hold themortgage until foreclosure, when either MERS or the mortgage servicer would foreclose. This is why itis so critical for MERS to claim it is an agent of every member who ever claimed ownership of themortgage--even if they are unknown--because there was never any legal recording of the transfers,hence, no clear chain of title. The Ibanez decision ruled that without the clear chain--with every claimedowner showing exactly how it obtained the mortgage, all the way back to origination--then foreclosurecannot be completed. It is likely that many, most, or all securitized mortgages will fail to meet the Ibanezrequirement. Indeed, that was fundamentally the MERS model: to reduce costs by eliminating thenecessary assignments of interest at each stage, and the public recordings that make it all transparentand virtually fraud-proof.

Quiet Title actions in Utah. In Utah, judges are ruling in favor of homeowners in "quiet title actions".

The owner seeks clear title to property free of lien by lenders or others. In a quiet title action, the ownertakes advantage of the fact that MERS listed itself on the trust deeds as the beneficiary of the note.Utah courts have recognized that as a fraud. MERS -- with no financial interest in the mortgage --cannot be beneficiary. It is just a data registry. It makes no loans. It does not receive mortgagepayments. Hence, homeowners can go to court without any notification to MERS, serving legal papersonly to the legal owners of the title to the property. This is usually some title company, that is supposedto be the trustee of the mortgage. In cases in Utah, these title companies either did not respond at all,or they simply said that they didn't "know who the beneficiary of the trust deed is" and denied anyinterest in the deed. The judges then hand the deeds over to the homeowners. While they can still be

sued for the mortgage payments they owe, the homeowners got their homes free and clear. In otherwords, no one can foreclose on them. Their debts are unsecured. And note that because MERSevaded public recording, whatever is in the public records (that is -- the legal ownership) will not beconsistent with MERS's illegal registry of ownership. It is probable that almost all publicly recordedowners of the mortgages believe they have transferred ownership. Quiet title actions are apparentlylegal in all states, designed to let homeowners discover who owns their mortgages. But since MERShas so hopelessly screwed up the records, quiet title actions might permit many or most homeownersto walk away with clear titles to their property. Meaning, the banks are screwed. Royally. By thepeasants.

Title Insurers take a deep breath and refuse to take the risk. As Yves Smith reported on Sunday,

AFX Title company is warning that because MERS broke the chain of title, the foreclosing banks haveno legal right to the properties: "In many cases, the transfer of ownership of the mortgage loan hasgone from the original lender, through several owners, and then to the foreclosing bank, none of whichis recorded on the property title history." This creates a mess for subsequent purchases. Titlecompanies are now refusing to insure the title against defects, and are forcing the banks to assume allliability. As Yves says, this is a direct result of the MERS practice of eliminating assignments of themortgages when they were sold. Lesson? Do not buy foreclosed property.

MERS's Sloppy Practices Widely Recognized. In two excellent posts on Sunday, Yves Smith has

detailed some of the latest revelations about MERS's sloppy practices and bold-faced lies about them.





Particularly damning is a presentation given by Daniel Pennell, a process and systems expert, on a lawproposing a ban on the use of MERS in Virginia. I will not go through the details as they are clearlypresented on Naked Capitalism. We have long known that MERS did not have even a minimal systemof controls in place that would be able to handle the tens of millions of mortgages. Pennell foundmultiple places where error (including human error) could take place, and explains how breakdown,chaos, and fraud would be the inevitable result.

Note that entries into MERS are made by members, are voluntary, and are not subject to systematic

audit. Moreover, what is really shocking is that MERS disclaims any responsibility for accuracy. Yvesprovides the following quote from the MERS disclaimer:

"MERS makes no representations or warranties regarding the accuracy or reliability of the information provided. MERS disclaims responsibility or liability for errors, omissions,and the accuracy of any information provided. MERS does not input any of theinformation found on the MERS® System, but rather the MERS Members have thatresponsibility regarding mortgage loans in which they hold an interest.

Yet, it claims to be an agent of these members, and uses the "recording" at its registry as the basis forits claim that it can foreclose. But it has no idea whether any of the information is accurate, does notinput any information, and is not responsible for errors? In other words, it neither knows nor careswhether the bank that wants to foreclose has ever owned, much less still owns, the mortgage.

Pennell goes on to conclude that if other state supreme courts follow the Massachusetts example, the"defect rate for securitized mortgages is almost 100%" because of the MERS operating model.Further, he reviews Bank of America's admission that its document error rate is above 25% (and recallfrom above Citi's boast that its error rate is "only" 15%). As Bill Black exclaims, these are banks!Would you accept a 25% error rate on BofA's accounting of your checking account transactions? Thisis not just sloppiness--no bank, not even Citi or BofA could operate with that level of incompetence. Ithas to be fraud. And, of course, they are only admitting to the fraud that has been uncovered. AsPennell argues, the true fraud rate is probably closer to 100%.

OK, what is this all about? How could these monstrous banks run with fraud at approximately 100%?The securitization model was flawed from the beginning. It could never have worked. It was a massivePonzi scheme. The payment flows from borrowers could not support the huge infrastructure involved insecuritization--especially securitization of less-than-prime mortgages, and especially mortgages thatwere never subject to good underwriting. There is no doubt that banks did not do any underwriting--much less good underwriting--that is why the mortgages were called "low doc, no doc, NINJAs andliar's loans". They replaced underwriting with credit raters, quant models, securitizations, mortgageservicers, accountants, mortgage insurers and credit default swaps, MERS, and mortgage defaultservices. And tons of lawyer's fees.

As I have said, skyrocketing defaults and thus foreclosures were not a surprise--they were part of thebusiness model, necessary to get the higher risk and thus higher fees earned for Wall Street. There isno way that homeowners with stagnant incomes (not to mention the job losses that would result fromthe forthcoming financial crisis) could ever service that superstructure. Wall Street was getting 20% ofUS national value added and 40% of corporate profits. It only worked so long as there was anaccelerating boom in home prices that allowed over-indebted borrowers to refinance, and foreclosingbanks to sell houses into a rising market.

It was doomed, of course. The Obama administration has tried to reboot it. But that will fail because itrequires bail-outs and more importantly fraud on an unprecedented scale. Meanwhile, we destroyhomeownership in America and set back property rights in the nation by a thousand years or more.





MERS will not survive more than a few short weeks. It has virtually no employees, no loss reserves, nocapital. Its record-keeping is a joke. And it is all that is standing between the biggest banks andArmageddon -- the recognition that none of the banks has any legal claim on the property thatsupposedly backs the mortgage debts and thus the unbacked mortgage securities. If you ever wantedto live in interesting times, this is it.



47471019 Mers Huffing Ton Post 1-24-11 Randal Wray Editorial on Mers

Documents

Transcript of 47471019 Mers Huffing Ton Post 1-24-11 Randal Wray Editorial on Mers