Foreclosure crisis much deeper than robo-signers
I haven’t been writing about the foreclosure documentation crisis because I have been more focused on the ‘currency war’. But I want to flag three posts I wrote about this time last year on the mortgage and securitization market because they are relevant to this burgeoning foreclosure documentation crisis.
The robo-signer problem is just a flashpoint in what will later be seen as a market rife with fraud.
A majority of mortgage claims are missing one or more of the required pieces of documentation for a bankruptcy claims. Fees and charges on claims often are poorly identified and do not appear to be reasonable. The bankruptcy data reinforce concerns about the overall reliability of the mortgage service industry to charge homeowners only the correct and legal amount of the debt and to comply with applicable consumer protection laws.
–Misbehavior and Mistake in Bankruptcy Mortgage Claims – Katherine M. Porter
You have seen the posts at Naked Capitalism chronicling the latest salvos in the robo-signer debacle (see here for example). There are a few more in the links post this morning. The crisis in foreclosure documentation is much deeper than the specific issue of robo-signers which has precipitated the halt in foreclosures by major banks. The fact is the mortgage process in the US is broken because securitization has created a byzantine mess that is wholly unsuited for the large number of foreclosures now on-going.
Here’s what we learned last October:
The most common foreclosing party in court is a “corporate shield,” protecting lenders from legal action in cases of predatory lending
In August , the Kansas Supreme Court issued a ruling against a mortgage tracking service which may prove very costly to banks in foreclosure, leading to massive writedowns. It could be a life saver for many trapped in the foreclosure process. The case goes to the core of the functioning of massive markets in securitization and derivatives and has wide-ranging importance…
This case was decided on 28 August 2009 in favor of the homeowner Boyd Kessler (Document and link below). The issue was predatory lending. But there was more wrong here. MERS does facilitate liquidity in the MBS market, but it does a lot of other things that could harm consumers
- MERS also acts as a “corporate shield,” protecting lenders from legal action in cases of predatory lending.
- MERS can foreclose even though it is not the financial party with interest
- Because MERS is a distant intermediary, foreclosure can proceed without even producing an original mortgage note
- With MERS in control, consumers cannot access publicly available information to adequately determine who the holders of their note are.
If MERS is blocked from filing suit in many cases, there will be large losses accumulating at the holders of these notes. Expect to hear more about this very important case.
MERS, the party often enforcing foreclosure, should be limited its ability to act on behalf of a mortgagee in foreclosure.
- The relationship that MERS has to Sovereign is more akin to that of a straw man than to a party possessing all the rights given a buyer. A mortgagee and a lender have intertwined rights that defy a clear separation of interests, especially when such a purported separation relies on ambiguous contractual language. The law generally understands that a mortgagee is not distinct from a lender: a mortgagee is "[o]ne to whom property is mortgaged: the mortgage creditor, or lender." Black’s Law Dictionary 1034 (8th ed. 2004). By statute, assignment of the mortgage carries with it the assignment of the debt. K.S.A. 58-2323. Although MERS asserts that, under some situations, the mortgage document purports to give it the same rights as the lender, the document consistently refers only to rights of the lender, including rights to receive notice of litigation, to collect payments, and to enforce the debt obligation. The document consistently limits MERS to acting "solely" as the nominee of the lender.
- The Missouri court found that, because MERS was not the original holder of the promissory note and because the record contained no evidence that the original holder of the note authorized MERS to transfer the note, the language of the assignment purporting to transfer the promissory note was ineffective. "MERS never held the promissory note, thus its assignment of the deed of trust to Ocwen separate from the note had no force."
- "MERS does not take applications, underwrite loans, make decisions on whether to extend credit, collect mortgage payments, hold escrows for taxes and insurance, or provide any loan servicing functions whatsoever. MERS merely tracks the ownership of the lien and is paid for its services through membership fees charged to its members. MERS does not receive compensation from consumers." 270 Neb. at 534.
With the mortgagee unable to show ownership, the homeowner might even be able to stay in his home mortgage-free
This morning, Gretchen Morgenson has another good piece out describing how a judge nixed all claims by mortgagee which refused to modify a home owner’s mortgage.
The debtors’ revolt is on.
For decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.
On top of that, courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties.
In other words, with lenders in the driver’s seat, borrowers were run over, more often than not…
But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.
One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.
At issue is the question of what legal rights do lenders or their agents have in foreclosure in the new byzantine world of securitized mortgages. In the New York case the judge nixed the entire claim as the mortgagee could not prove it had legal claim to the mortgage note. With the mortgagee unable to show ownership, the homeowner might even be able to stay in his home mortgage-free, Morgenson attests. That’s huge – and we should definitely expect an appeal.
In the Kansas case, MERS, a mortgage registrar, and a second-mortgage mortgagee were not informed of the homeowners bankruptcy and disposition of assets and claims before judgment was made. Nevertheless, the district court, the appeals court AND the Kansas supreme court all upheld the original summary judgment arguing that MERS was not contingently necessary. While I would expect this case to be appealed because of the precedent it could set, I don’t see how it can be overturned after affirmation in every court – that is except through a politicization of the verdict.
Notice how PHH and MERS, the two lender agents in each cases, are not the actual owners of the mortgages. They are the servicers of the mortgages. This is why these cases have a lot to do with securitization.
Again, this is not just about robo-signers. The problem is much, much deeper.