- "Maybe this is like shock therapy. Maybe this will
actually get the lenders to the table and encourage them to work out deals
that are to the benefit of everybody."
-
- --Economist Karl E. Case, quoted in The New York
Times.
-
- The hits are coming fast and furiously. It appears major
Wall Street mortgage lenders could again be in serious trouble and
looking again for handouts.
-
- On September 20th, Ally Financial Inc., which owns GMAC
Mortgage, the nation's 4th largest lender, halted evictions and the resale
of repossessed homes in 23 states. This was after a document processor
for the company admitted that he had signed off on 10,000 pieces of foreclosure
paperwork a month without reading them. The 23 states were all those where
foreclosures must be approved by a court, including New York, New Jersey,
Connecticut, Florida and Illinois.
-
- On September 24th, Representatives Alan Grayson (D-FL),
Barney Frank (D- MA) and Corrine Brown (D-FL) directed a letter to Fannie
Mae questioning its use of "foreclosure mills," which were described
as "law firms representing lenders that specialize in speeding up
the foreclose process, often without regard to process, substance or legal
propriety." The letter followed a report by the Florida attorney general's
office in August that it was investigating three law firms that had allegedly
fabricated documents in thousands of cases to obtain final judgments of
foreclosure.
-
- On September 24, California attorney general Jerry Brown
asked GMAC to halt foreclosures in his state until the lender could prove
it was complying with a law that prohibits lenders from taking steps to
foreclose a home before making an effort to work with the borrower. California
is anon-judicial foreclosure state, meaning foreclosures do not require
the prior approval of a court.
-
- On September 28, JPMorgan Chase said it was halting
56,000 foreclosures because some of its employees might have improperly
prepared the necessary documents. All of the suspensions were in the 23
states where foreclosures require court approval.
-
- On September 29, the Washington Post reported that
a top federal bank regulator had directed seven of the nation's largest
lenders to review their foreclosure processes, after learning about widespread
mishandling of homeowner evictions. Besides JPMorgan Chase, they included
Bank of America, Citibank, HSBC, PNC Bank, U.S. Bank and Wells Fargo. The
Washington Post noted:
-
- "The paperwork problems range from potentially forged
documents to bank employees who never read borrowers' files before signing
off on an eviction. . . ."While we don't expect our review to find
that consumers were harmed, we will take appropriate action if we find
any impact," JP Morgan spokesman Tom Kelly said."
-
- No harm perhaps except the illegal taking of thousands
of homes without due process . . . .
-
- On September 30, Rep. Alan Grayson posted a devastating
seven-minute video, in which he gave four real-world examples of such travesties
of justice, including a man who was foreclosed on when he didn't have a
mortgage and paid cash for the home; a home that had two foreclosure suits
against it because both servicers claimed ownership of the title; and a
couple foreclosed on over a contested $75 late fee.
-
- Grayson blamed the massive foreclosure problems largely
on the electronic shortcut called MERS. "The banks simply digitized
mortgage titles into a privatized system, called the Mortgage Electronic
Registry System (or MERS)," he said. "And it did the transfers
by trading Excel spreadsheets among the banks and trusts, rather than endorsing
the notes as required by their own contracts, by state real estate law
and by IRS rules." He stated that 60 million properties are recorded
in the name of MERS -- 60% of the mortgages in the USA, and 97% of the
loans made between 2005 and 2008.
-
- On October 1, Bank of America announced that
it was delaying foreclosures in 23 states.
-
- The same day, Connecticut Attorney General Richard Blumenthal
took the radical step of putting a halt to all foreclosures from
all banks in his state.
-
- A Box Even Houdini Couldn't Escape?
-
- All of this is a major headache for the banks, but according
to the New York Times, "The companies say they are reviewing
their procedures to take care of any violations." They seem to think
they can correct the problem by redoing some paperwork. But if the holdings
in recent court decisions are upheld, it will not be just a question
of hiring extra staff to clean up some files. For all those mortgages filed
in the name of MERS, say these courts, the chain of title has been irretrievably
broken. Humpty Dumpty has had a great fall and cannot be put back together
again.
-
- MERS is simply an electronic data base. On its website
and in assorted court pleadings, it declares that it owns nothing. It was
set up that way intentionally so that it would be "bankruptcy-remote,"
something required by the credit rating agencies in order to turn the mortgages
passing through it into highly rated securities that could be sold to investors.
MERS not only has no assets; it has no employees. The thousands of people
enlisted to sign affidavits on its behalf are merely conduits. The arrangement
satisfied the ratings agencies, but it has not satisfied the courts. Increasingly,
judges are holding that if MERS owns nothing, it cannot foreclose, and
it cannot convey title by assignment so that the trustee for the investors
can foreclose. MERS breaks the chain of title so that no one has standing
to foreclose. The homes are effectively owned free and clear.
-
- That does not mean the homeowners don't owe money to
someone. They do. But the claim for relief is not in "law" (by
virtue of an enforceable contract or rule) but in "equity" (a
remedy provided just because it is fair), and MERS is not the proper plaintiff.
Every MERS case involves a securitization, which means the real parties
in interest are a group of investors somewhere; and before the homeowners
can be made to pay, the investors have to come forward and prove not only
that they are the parties owed the money, but the actual sums they are
owed. In some cases they might already have been paid; for example, by
insurers on credit default swaps held by the investment pool. The investors
are entitled to recover in equity only so much as they are actually out
of pocket, not the full amount of the original promissory notes, since
they were not parties to those notes and there is no way to re-establish
the chain of title.
-
- What About the Non-judicial Foreclosure States?
-
- Foreclosures have been suspended by JPMorgan, GMAC and
BOA in 23 states, but what about the rest? The others are non-judicial
foreclosure states, which means they allow foreclosure through a power
of sale clause in a deed of trust without going to court. The presumption
is that if the lender doesn't have to prove his standing to sue before
a judge, he can proceed. State laws in non-judicial states allow the sale
of a property to satisfy a foreclosure as long as the trustee follows the
regulations concerning notice. That would seem to violate Constitutional
due process, but the United States Constitution has held that due process
protections apply only when the government is involved in the taking of
property. When a deed of trust and promissory note are executed between
two private parties (homeowners and lenders), there is no automatic due
process protection. The homeowners agreed to it in writing; case closed.
-
- But here's the catch: what if the lender signing the
original documents is not the party foreclosing on the property? Then it
becomes a question of fact whether the foreclosing party has authority
to proceed, and that makes it a judicial issue a question of fact
for the courts. If the foreclosing party can show a clear chain of title
an assignment or progression of assignments from the original lender
to himself he is home free. But courts have increasingly been holding
that MERS breaks the chain of title. Foreclosure expert Neil Garfield
argues that even in non-judicial foreclosure states, that means the
investors have to go to court to prove their case. And when they do, they
will run up against the brick wall of MERS. He concludes:
-
- "There will be a head-slapping moment when title
carriers, attorneys, judges and administrative agencies and clerks suddenly
realize that the monster created on Wall Street has its equivalent in the
public records of counties across the nation. I doubt if more than 6-7%
of all the foreclosures in the past 10 years have resulted in clear title
delivered to anyone. And the only corrective instrument can come from the
original owner. That homeowner is sitting in the catbird seat and doesn't
know it. Millions of people who THINK they have lost their homes still
own them and if anyone wants a signature from those people to clear title,
they are going to be required to pay dearly, which is at it should be.
Eventually the purse gets returned to the victim from whom it was snatched."
-
- To Subsidize or Nationalize?
-
- Where does that leave JPMorgan, GMAC, Bank of America,
and the other major lenders? Investors have massive claims against these
banks, and so do homeowners. A major title insurance company has
already said it will not insure title to properties foreclosed upon by
GMAC until further notice. Moody's has placed the servicer ratings
of GMAC and JPMorgan Chase on review for possible downgrade, and the Treasury
is asking regulators for an investigation.
-
- Investment adviser Christopher Whalen thinks
we could soon be looking at more Wall Street bankruptcies. If so, hopefully
we won't fall into the trap this time of underwriting the losses while
letting the banks keep the profits. If we the people are picking up the
tab, we should insist on owning the banks.
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