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States Fight Back Against MERS Mortgage Fraud
Apr 7, 2013 | Washington's Blog
Rhode Island Tries to Slay the MERS Dragon
A prominent economist said about the 2008 financial crisis:
“At the root of the crisis we find the largest financial
swindle in world history”, where “counterfeit” mortgages were
“laundered” by the banks.
The Mortgage Electronic Registration Systems – MERS – was one of the
main ways the swindle was done, and the main way in which counterfeit
mortgages were laundered by the banks.
MERS is a shell company with no employees, owned by the giant banks.
MERS threw out centuries of well-established law about how real estate is transferred – and cheated governments out of tens of billions of dollars in recording fees.
Harper’s reported:
“What’s happened,” said Christopher Peterson, a law
professor at the University of Utah who has written extensively about
MERS, “is that, almost overnight, we’ve switched from democracy in
real-property recording to oligarchy in real-property recording.” The
county clerks who established the ownership of land, who oversaw and
kept the records, were democratically elected stewards of those records,
said Peterson. Now a corporation headquartered outside Washington,
D.C., oversaw the records. “There was no court case behind this, no
statute from Congress or the state legislatures,” Peterson told me. “It
was accomplished in a private corporate decision. The banks just did
it.” Peterson said it was “not a coincidence” that more Americans than
at any time since the Great Depression were being forced out of their
homes just as records of home ownership and mortgages were transferred
wholesale to a privatized database.
MERS was also the engine which allowed securitization of mortgages. Bloomberg reported:
MERS played a key role in the bundling of mortgages into
securities that reached a frenzy before the economic decline of 2008,
critics including Grayson of Florida said. It allowed banks to sell and
resell home loans faster, easier and cheaper, he said.
“MERS was a facilitator of securitization,” said Grayson, a Democratic member of the House Financial Services Committee.
How?
Steve Liesman explained in 2007:
How do you create a subprime derivative? …You take a
bunch of mortgages… and put them into one big thing. We call it a
Mortgage Backed Security. Say it’s $50 million worth… Now you take a
bunch of these Mortgage Backed Securities and you put them into one very
big thing… The one thing about all these guys here [in the one very big
thing] is that they’re all subprime borrowers, their credit is bad or
there’s something about them that doesn’t make it prime…
Watch, we’re going to make some triple A paper out of this… Now we
have a $1 billion vehicle here. We’re going to slice it up into five
different pieces. Call them tranches… The key is, they’re not divided by
“Jane’s is here” and “Joe’s is here.” Jane is actually in all five
pieces here. Because what we’re doing is, the BBB tranche, they’re going
to take the first losses for whoever is in the pool, all the way up to
about 8% of the losses. What we’re saying is, you’ve got losses in the
thing, I’m going to take them and in return you’re going to pay me a
relatively high interest rate… All the way up to triple A, where 24% of
the losses are below that.
Twenty-four percent have to go bad before
they see any losses. Here’s the magic as far as Wall Street’s concerned.
We have taken subprime paper and created GE quality paper out of it. We
have a triple A tranche here.
This may have been different from many buyers’ expectations:
Buyers [of mortgage backed securities] thought that they
were buying specific tranches tied to real mortgages, but they were just
getting a statistical cut of wispy, non-corporeal representations of
information related to the entire universe of mortgages floating around
in the digitized MERS ether.
Harper’s notes:
At the heart of the clouded-title problem is a
Virginia-based company, recently much in the national news, called
Mortgage Electronic Registration Systems. MERS was created in 1995 as a
privately held venture of the major mortgage-finance operators, chief
among them the government-sponsored mortgaging entities Fannie Mae and
Freddie Mac. Its stated purpose was to manage a confidential electronic
registry for the tracking of the sale of mortgage loans between lenders,
which could now place loans under MERS’s name to avoid filing the
paperwork normally required whenever mortgage assignments changed hands.
No longer would the traffickers in mortgages have to document their
transactions with county clerks, nor would they have to pay the many and
varied courthouse fees for such transactions. Instead, MERS was listed
in local recording offices as the “mortgagee of record,” the
in-name-only owner, a so-called nominee for the lender, so that MERS
would effectively “own” the loan where the public record was concerned,
while the lenders traded it back and forth.
This centralized database facilitated the buying and selling of
mortgage debt at great speed and greatly reduced cost. It was a key
innovation in expediting the packaging of mortgage-backed securities.
Soon after the registry launched, in 1999, the Wall Street ratings
agencies pronounced the system sound. “The legal mechanism set up to put
creditors on notice of a mortgage is valid,” as was “the ability to
foreclose,” assured Moody’s. That same year, Lehman Brothers issued the
first AAA-rated mortgage-backed security built out of MERS mortgages. By
the end of 2002, MERS was registering itself as the owner of 21,000
loans every day. Five years later, at the peak of the housing bubble,
MERS registered some two thirds of all home loans in the United States.
Without the efficiencies of MERS there probably would never have been a mortgage-finance bubble.
After the housing market collapsed, however, MERS found itself under
attack in courts across the country. MERS had singlehandedly unraveled
centuries of precedent in property titling and mortgage recordation, and
judges in state appellate and federal bankruptcy courts in more than a
dozen jurisdictions—the primary venues where real estate cases are
decided— determined that the company did not have the right to foreclose
on the mortgages it held.
In 2009, Kansas became one of the first states to have its supreme
court rule against MERS. In Landmark National Bank v. Boyd A. Kesler,
the court concluded that MERS failed to follow Kansas statute: the
company had not publicly recorded the chain of title with the relevant
registers of deeds in counties across the state. A mortgage contract,
the justices wrote, consists of two documents: the deed of trust, which
secures the house as collateral on a loan, and the promissory note,
which indebts the borrower to the lender. The two documents were
sometimes literally inseparable: under the rules of the paper recording
system at county court-houses, they were tied together with a ribbon or
seal to be undone only once the note had been paid off. “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,” said the Kansas court, “the mortgage may become unenforceable.”
MERS purported to be the independent entity holding the deed of
trust. The note of indebtedness, however, was sold within the MERS
system, or “assigned” among various lenders. This was in keeping with
MERS’s policy: it was not a bank, made no loans, had no money to lend,
and did not collect loan payments. It had no interest in the loan, only
in the deed of trust. The company—along with the lenders that had used
it to assign ownership of notes—had thus entered into a vexing legal
bind. “There is no evidence of record that establishes that MERS either
held the promissory note or was given the authority [to] assign the
note,” the Kansas court found, quoting a decision from a district court
in California. Not only did MERS fail to legally assign the notes, the
company presented “no evidence as to who owns the note.”
Similar cases were brought before courts in Idaho, Massachusetts,
Missouri, Nevada, New York, Oregon, Utah, and other states. “It appears
that every MERS mortgage,” a New York State Supreme Court judge recently
told me, “is defective, a piece of crap.” The language in the judgments
against MERS became increasingly denunciatory. MERS’s arguments for
standing in foreclosure were described as “absurd,” forcing courts to
move through “a syntactical fog into an impassable swamp.”
Ellen Brown explained the significance of MERS in this process:
The top tranche is triple A because it includes the
mortgages that did NOT default; but no one could know which those were
until the defaults occurred, when the defaulting mortgages got assigned
to the lower tranches and foreclosure went forward. That could explain
why the mortgages could not be assigned to the proper group of investors
immediately: the homes only fell into their designated tranches when
they went into default. The clever designers of these vehicles tried to
have it both ways by conveying the properties to an electronic dummy
conduit called MERS (an acronym for Mortgage Electronic Registration
Systems), which would hold them in the meantime. MERS would then assign
them to the proper tranche as the defaults occurred. But the rating
agencies required that the conduit be “bankruptcy remote,” which meant
it could hold title to nothing; and courts have started to take notice
of this defect.
(Gonzalo Lira made the same point.)
Indeed, the secretary and treasurer of MERS admitted this in a deposition, stating:
As a requirement for mortgages that were securing loans
or promissory notes that were sold to securitize trust, the rating
agencies would only allow mortgages MERS — well let me step back. They
required that a bankruptcy remote single purpose entity be created in
order for transactions holding loans secured by MERS, by mortgages MERS
served as mortgagee to be in those pools and receive a rating, an
investment grade rating without any changes to the credit enhancement.
They required that to be a bankruptcy remote single purpose subsidiary
of MERS, of Merscorp.
(page 32, lines 9-20).
Matt Taibbi pointed out:
MERS … is essentially an effort at systematically evading
taxes … and hiding information from homeowners in ways that enabled the
Countrywides of the world to defraud investors and avoid legal
consequences for same.
***
MERS was at least in part dreamed up by Angelo Mozilo of Countrywide.
***
For those of you wondering why so many localities are broke, here’s one small factor in the revenue drain. Counties typically charge a small fee for mortgage registration,
roughly $30. But with MERS, … you don’t need to pay the fee every time
there’s an ownership transfer. Multiply that by 67 million mortgages and
you’re talking about billions in lost fees for local governments (some
estimates place the total at about $200 billion).
Outrageously, MERS actually marketed itself to its customers as a way
to save money by avoiding the payment of legally-mandated registration
fees. Check out this MERS brochure from 2007.
It brags on the face page about its fee-avoiding qualities (“MINIMIZE
RISK. SAVE MONEY. REDUCE PAPERWORK”) and inside the brochure, in
addition to boasting about helping clients “Foreclose More Quickly,” it
talks about how clients save money because MERS “eliminates the need to
record assignments in the name of the Trustee.”
All of this adds up to a system that enabled the mortgage industry to
avoid keeping any kind of proper paperwork on its frantic, coke-fueled
selling and re-selling of mortgage-backed securities during the bubble,
and to help the both the Countrywide-style subprime merchants and the
big banks like Goldman and Chase pull off the mass sales of crappy loans
as AAA-rated securities.
(The same mortgage was sometimes pledged to numerous buyers at the same time.
This wouldn’t have been possible without the vaporware title given by
MERS. And some – like foreclosure attorney Neil Garfield – think that
the ability to pledge the same mortgage multiple times is a feature, rather than a bug, of MERS. And see this.)
Relief Must Come at the State Level
In any event, given that the head of the U.S. Department of Justice used to represent MERS – and that the D.C. politicians are lackeys for the big banks which own MERS – the only hope is at the state level.
Some state courts have, in fact, declared MERS illegal … or at least without power to foreclose on property.
The next key battle is taking place right now in Rhode Island.
Specifically, the Rhode Island Attorney General and state legislators
are trying to slay the MERS dragon within their state:
Citing the irregularities with the recording of mortgages and
assignments that negatively impact municipalities and consumers,
Attorney General Peter F. Kilmartin filed legislation to require that
all transfers of a mortgage interest on residential property be recorded
to provide a clean chain of title. The legislation, S0547 sponsored by
Senator William Conley (District 18, East Providence, Pawtucket) and
H5512 sponsored by Representative Brian Kennedy (District 38, Hopkinton,
Westerly), is scheduled to be heard before both the Senate Committee on
Judiciary and House Corporations Committee on Tuesday, March 26, 2013.
The legislation makes it easier for borrowers and regulators to
determine who owns loans secured by mortgages on Rhode Island property.
Borrowers facing foreclosure will be able to more easily discover who
owns their loans before it is too late, and municipalities will be able
to identify lenders who are responsible for abandoned homes. The
legislation will [stop] the practice of having the vast majority of
mortgages held in the name of a private registry with no interest in the
loans known as … “MERS.”
Since 1997, the banking industry has been using MERS, which lenders
claim has minimized their administrative and financial burdens of the
recording process. However, this practice has basically privatized the
local land recording process, thereby undermining the accuracy of public
records and leading to negative consequences for consumers and
municipalities.
“The changing of servicing and subservicing rights within the lending
history often leaves the borrower confused regarding which entity they
are supposed to be dealing with on a monthly basis and why,” said
Attorney General Kilmartin. “The legislation is designed to give
borrowers a public record of who ultimately owns their loans, increasing
the ability of homeowners to negotiate with their lenders and their
ability to have full knowledge of their rights, counterclaims and
defenses if they are faced with litigation.”
“Rhode Island has experienced a record number of foreclosure and
short sales since the mortgage crisis,” said Representative Kennedy,
“This legislation will assist homeowners in knowing who maintains the
note on their property while also ensuring that local cities and towns
will know the potential owner of a property after a forced sale has
occurred, to ensure that municipalities have the proper information
available on the documentation for taxation and municipal recording
fees.”
“With this legislation, we are taking another step toward easing the
pain of the housing and mortgage foreclosure crisis, which has affected
both the state’s municipalities and individual consumers,” Sen. William
J. Conley Jr. said. “It is common sense to record these transfers and
take out the unnecessary middle man. Rhode Islanders need to know
exactly who they are dealing with and how they can protect themselves.
The foreclosure process is tough enough already without adding the
frustration of MERS.”
By having a nominee entity listed as the mortgagee, the banking
industry has privatized Rhode Island’s mortgage recording system, and
left the accuracy of public land records at the mercy of a private
company’s database. Federal banking authorities have already concluded
that the private mortgage system contains numerous inaccuracies and has
not been accessible to homeowners. Moreover, the nominee frequently has
no contractual relationship with the actual noteowner, despite the
contention in the mortgage documents of a nominee relationship.
Not only has this private system deprived cities and towns the
recording fees that they are owed for over 15 years, it has also
hampered the ability of municipalities to adequately address abandoned
property and nuisance issues because the mortgagee liable for these
issues is not clear from the chain of title.
Consumers are adversely impacted due to the fact that their mortgage
loans change hands multiple times through the life of the loan without
proper recording. The lack of a contemporaneous public record hampers
their ability to deal directly with their lenders and enforce their
legal rights.
The banking industry’s practice of using a nominee entity process for
recording deeds has become a highly litigated issue by consumers,
municipalities and counties throughout the country. This very issue is
currently being litigated in Rhode Island with private citizens and
municipalities calling into question the legality of using the nominee
process to record mortgage interests. The multitude of legal issues
surrounding the nominee process has caused confusion and delay in
foreclosure proceedings in our State, and has raised the critical issue
of whether a nominee entity can enforce the power of sale. High Courts
in other States, including Massachusetts and Washington, have already
ruled that a nominee cannot utilize the power of sale [i.e. MERS cannot
foreclose on property]. This legislation resolves this issue in Rhode
Island by simply eliminating the nominee recording process and restoring
accuracy and transparency to the public land records [i.e. killing
MERS].