FedUpUSA

Archive for December 14th, 2010

In part one of this series I showed that MERS recommended that mortgage servicers retain the “wet ink” notes that borrowers signed. These notes are required in 45 states to foreclose on a home. Not only does the foreclosing party need to physically hold the note, but the note must be properly endorsed and transferred every time a mortgage is sold. A clear chain of title must be demonstrated to make the note valid. This is to protect borrowers from fraud — no one can manufacture a note, claim to be a creditor, and then take a homeowner’s property. And this is especially important when mortgages are securitized and bought and sold a dozen times — if there is no clear chain of title, the borrower can never be sure who is really the creditor. 

But, in fact, the notes were never transferred, there is no clear chain of paperwork, and in many cases the notes have “disappeared” so that when the servicers or MERS tries to foreclose, they must file “lost note affidavits” claiming rightful ownership even though they do not have evidence. They have also been caught using “robo-signers” to forge documents — and sometimes they have foreclosed on the wrong properties and even seized homes on which there was no mortgage. That is precisely why the law requires proper transfers of the note. Without that, the mortgage is a fraud and foreclosure is fraudulent. 

By itself, all of this is a horrific scandal, involving up to 65 million mortgages — the number of mortgages registered at MERS, most of which presumably were subjected to MERS’s guidelines and extremely sloppy record-keeping. But like Shrek’s onion, it is much more complicated than that — with layer after layer of fraud piled on fraud. There are many angles to be explored, most of them too complex and arcane to be pursued in a short column. Here, in part two, I will discuss the implications for the securities that bundled the fraudulent mortgages registered at MERS. Not only did MERS defraud the counties out of their recording fees and the homeowners out of their homes, but it also helped to perpetrate securities fraud and federal tax fraud. Fortunately for the investors in these securities, the securitization process was fatally flawed, meaning that they can return to the issuing banks and demand their money back. But that implies, of course, that the banksters are hopelessly insolvent — on the hook for hundreds of billions of dollars. 

Inevitably, they will turn to Uncle Sam for more handouts. Get ready for more backroom deals made by the Fed and Treasury to rescue firms like Bank of America. If you loved the first three rounds of this financial crisis, you will love the next six rounds as markets pummel Wall Street banks, with Uncle Sam as referee applying the smelling salts to revive it for yet another round (whilst its CEOs skim more billions off the top in compensation). Ultimately, it will not work. Wall Street will go down for the count — but probably not until it drags Main Street through a great depression that your great grandkids will study in the history books. And, by the way, they will laugh at the misguided efforts of the thoroughly compromised one-term Obama administration that focused its efforts at budget-balancing in the face of the worst headwinds America had ever seen. 

MERS and Securitization 

Recall from part one that mortgage lenders and servicers are members of MERS, with one employee of each deputized by MERS. This allowed the fiction that resales of mortgages are merely in-house transfers and hence there is no need to pay a recording fee to the county where the property is situated. MERS claims to be the mortgagee of record, holding the mortgages for its members. At the same time, it recommends that servicers retain the notes, but since these are members of MERS, and since MERS has an employee in each, MERS claims it has the legal standing to foreclose on delinquent borrowers. 

Mortgages were typically securitized and pooled in a Real Estate Mortgage Investment Conduit (REMIC) that would hold them in trust. Done properly this allowed them to take advantage of an IRS tax exemption. However, to avoid the county recording fees, MERS claimed to hold the mortgages and notes (technically, the mortgage and the note are separate, and it is the note that is required to foreclose — without the note, the mortgage has been ruled by courts to be a “nullity” — see Floyd Norris) so that they could be traded without paying the fees and filing the paperwork. In fact, the servicers held the notes. But if the servicers were holding them, how could they be in the REMIC trust? The IRS code is very strict — the paperwork must be conveyed to the REMIC and there must be a clear paper chain of title through the securitization and sales. Without the paperwork, the securitizations may not be legal, and could subject investors to back taxes and penalties. (See Adam Levitin) 

But, as always with the Wall Street onion, things are worse when we dig deeper. Almost all of the residential mortgage backed securitizations were done under New York state law — which is even stricter than the REMIC requirements. That law wanted to make the securities as safe as possible, “bankruptcy remote” so that if the issuing banks failed, bank creditors could not come after the securitized mortgages — to seize the notes and recover losses. This is why it was essential that the notes and mortgages be physically conveyed to the trustees. Remember that the major banks are also owners of the servicers — so if the servicers retain the notes and the bank fails, the bank’s creditors might be able to claim the notes and mortgages. So according to NY state law it is the “Pooling and Servicing Agreement” that governs the securizations. These require that the notes and mortgages are held by the REMIC trustee. Indeed, they require that the trustee check to make sure all notes are conveyed; if there are any mortgages included in the “pool” without proper paperwork, then they must be replaced by mortgages with notes. All of this is supposed to be certified by the trustee as completed — usually within about six months. (For an excellent explanation of the details, see Yves Smith) 

We now know beyond question that the notes were not typically transferred — both MERS’s own document as well as court testimony by top management of servicers make it clear that the “customary” practice was for the servicers to retain the notes. We also know that almost all securitizations were done in NY. And we know that the PSAs required transfer of the notes to the trustees — who were required to certify that this was done. From this we can conclude that a) the trustees either did not perform the certification, or they lied, and b) the securities are no good. Probably most of them; maybe all of them. Fraudulent. 

Lo and behold, the mortgages went spectacularly bad. That would mean the securities holders are stuck with losses. But only if the securitizations were legal. They were not. They failed on two accounts: the underlying mortgages did not correspond to the “representations” made to securities holders, and the notes were never endorsed and sent to the trusts. That means the holders of the trillions of dollars of securities can present them to the originating banks, demanding their money back. 

The servicers are now “misplacing” all the documents, including the notes, associated with the mortgages on which they are foreclosing. The hope is that MERS and the mortgage servicing banks can get the properties, dispose of them in firesales, and pay pennies on the dollar to securities holders before they discover they’ve been scammed from here to Pluto. Hence it would seem the notes were not really lost, but rather are being destroyed to cover the fraud. And if this is true, MERS and the big banks are conspiring to commit foreclosure fraud as they destroy documents and create new counterfeit paper trails. The reader who pointed me to the MERS document put it this way: 

When we get into the “work product” of the ‘robo-signers’ as seen in the sheer volume of Lost Note Affidavits, it is evident that these exist not simply because notes were “lost” but as a cover-up because the trustee and/or servicers realized early on that the notes were never properly endorsed and transferred or delivered to the trust so they “disappeared” the physical piece of paper and any allonges thereby eliminating any evidence contrary to the trust’s ownership of the notes. As you wrote ‘Those pesky little documents might come back to haunt them should someone later file a lawsuit.’

Yep, that is why they are shredding them and hiring Burger King kids to manufacture new ones. More fraud to cover previous fraud. Yes, this is go-to-jail fraud, but what the heck — if you are already facing time behind bars you might as well go for broke. 

I share this reader’s outrage: 

Reading through “MERS Recommended Foreclosure Procedures – State by State“, it becomes obvious that MERS was set up to be one big steamrolling foreclosure machine. I simply cannot get over the fact that this document was created in 1999. How nicely MERS accommodates predatory servicers inflicting servicing fraud on homeowners in order that deal makers, proprietary traders and certain hedge funds could profit many times over with their rigged credit default swap bets shorting subprime. This was a very clever, interlocking scheme of complicity on the part of many involved perpetrators.

You don’t have to be a conspiracy theorist to smell something rotten in Denmark about all of this. Maybe there was never any overarching plan. Maybe MERS was set up merely to defraud counties out of their mortgage registration fees. Perhaps MERS never realized that failure to transfer the notes to the trustees invalidated all the securities, while contributing to tax fraud. 

If all that is true, then the destruction of documents and the creation of falsified documents by “Burger King” robo-signers was not planned back in 1999. But it is still go-to-jail fraud. And the big banks are still on the hook for hundreds of billions — maybe trillions — of dollars. In other words, it is still a big problem. 

Where Do We Go From Here? 

To recap, MERS’s own documents demonstrate beyond question: 

1. The notes were never transferred, as required by Federal and NY state law, to the trustees of the REMICs;
2. At best, the notes were retained by the mortgage servicers as directed by MERS (many never left the mortgage brokers, many of whom are now bankrupt);
3. MERS claims to own the notes and therefore the mortgages to speed foreclosure;
4. Actually, MERS does not hold the notes, which are held by servicers, but MERS instead “deputizes” employees of the servicers so that it can claim notes are transferred “in house” to avoid paying recording fees as well as avoiding maintenance of clear chains of title;
5. On foreclosure, the documents are “disappeared” because they demonstrate the notes were never endorsed and transferred as required by law, with MERS and the servicers filing “lost note affidavits” to dupe the judges into allowing illegal foreclosures to proceed and to dupe securities holders so that they do not demand restitution;
6. Servicers ensure homeowners default, as they “lose” mortgage payments, credit them to the wrong accounts, or helpfully recommend to homeowners that they stop making payments–all of this is to speed foreclosure to ensure securities holders do not realize they have been duped as they are paid pennies on the dollar for toxic securities;
7. This also ensures that the investment banks that originated the toxic securities win their credit default swap bets they placed against the homeowners, with favored hedge fund managers like Paulson also winning CDO bets on failures;
8. The faster the foreclosures can be processed through manufacture of fraudulent documents by Robo-signers, the lower the chance that MERS and all of its clients will be brought to justice.

There is a community of interests that can bring together the securities holders (including PIMCO and the NYFed) and the defrauded homeowners to stop the illegal foreclosures. The best thing for the investors is to demonstrate that the securities are fraudulent because the underlying mortgages did not meet the representations and because the notes were not legally transferred. The best thing for the homeowners is to demonstrate that because the notes were not legally transferred, no one has standing to foreclose. While they might still owe money on their mortgages, no one can take their homes away from them. That provides the proper incentive to force banks to modify the mortgages. 

Further, and somewhat ironically, leaving homeowners in their homes is best for the banksters at the level of the economy as a whole. Since the securities investors will be able to force the banksters to take back the securities, the loss minimizing solution for banks is to stop the foreclosures that are depressing real estate prices. That can then buy time to modify the mortgages to ensure homeowners can stay in the homes and service their debt. Instead, the banks are pushing for Congress to retroactively legalize the frauds they perpetrated against counties, borrowers, and investors. As always, Wall Street wants someone else to pay for its crimes — and is willing to destroy the property rights that are fundamental to a system based on private property in order to protect CEO compensation on Wall Street. 

Here is the alternative solution President Obama needs to consider. 

• An immediate moratorium on foreclosures of any mortgages that are, or ever were, registered at MERS;
• Declare all outstanding fraudulent securities null and void, require securitizing banks to make restitution to investors, and sue the banks for restitution of the back taxes owed by REMICs;
• If this makes the banks insolvent, begin to resolve them, shutting them down;
• Prohibit Fannie and Freddie and any chartered bank from dealing with MERS, which is an organization formed to perpetrate fraud;
• Investigate MERS for fraudulent activity, require restitution of all county recording fees that were evaded, and punish the guilty;
• Formulate a policy to help homeowners who have been victims of lender fraud, with a goal of reducing mortgage payments to something they can afford; and
• Let Congress know he will veto any legislation that legalizes the fraud perpetrated by MERS, by mortgage servicers, and by originating and securitizing banks.

These actions will help to restore the rule of law, while punishing the guilty. And stopping (illegal) foreclosures will reduce the pressure on real estate prices. By itself this will not put the US on the road to recovery, but it is certainly a step in the right direction. 

In the final part of this series I will conclude with an assessment of the role that self-supervision by Wall Street played — and continues to play — in propagating this crisis, with MERS as the prime example of the folly of the delusion that the interests of banksters coincide in any manner with the public interest. 

L. Randall Wray – Professor of Economics and Research Director of the Center for Full Employment and Price Stability, University of Missouri-Kansas City

Huffington Post

Alabama Republican Spencer Bachus, the incoming chairman of the House banking committee, suggested Congress and federal regulators should play a subservient role with banks.

“In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks,” Bachus told The Birmingham News in an interview.

The Republican leadership last week designated Bachus the next chairman of the powerful House Financial Services Committee, which is tasked with overseeing banks, financial markets, housing and consumer credit.

Democrats characterized the remark as a Freudian slip, nicknaming the Alabaman “Big Bank Bachus” and claiming the new Republican-controlled House will put the interests of financial institutions ahead of the American public.

“Congressman Spencer ‘Big Bank’ Bachus has given Americans a startlingly honest answer about the House Republican agenda – do whatever is good for the big banks and Wall Street special interests, rather than what’s good for hardworking Americans,” said Jesse Ferguson, a spokesman for the Democratic Congressional Campaign Committee.

Bachus later told the Birmingham News he merely meant Congress shouldn’t micromanage banks.

The congressman from Alabama’s 6th district has throughout his 18-year House career raised millions from financial interests, including over $1 million from commercial banks alone, according to the Center for Responsive Politics.

He has received over $800,000 from the real estate industry, $700,000 from securities and investment firms, and $415,000 from credit companies — all of which he will have extraordinary influence over as banking committee chair.

Bachus was an important negotiator for the $700,000 billion Troubled Asset Relief Program (TARP) of 2008 — often derided as the “bank bailout” — which angered the public but also prevented a widespread collapse of the financial system. It passed with wide bipartisan support.

The outgoing chairman, Rep. Barney Frank (D-MA), played an instrumental role in developing sweeping financial regulatory reforms enacted by President Barack Obama in July.

RawStory

Pay attention.  While the entire country is focused on the dog and pony show in Washington DC over tax cuts for the ‘rich,’ what is TRULY destroying the American middle class is the TRILLIONS of dollars being transferred to the banking sector and Wall Street via the perpetual bailout machine.  Our economic situation has absolutely nothing to do with whether or not the Bush tax cuts are extended and EVERYTHING to do with stealing taxpayer money to give to insolvent banking institutions and Wall Street, both of which defrauded the entire world.  Not until all the bailouts are stopped, the money clawed back and returned to the taxpayers and the criminals jailed do we have any hope of ‘recovery’ – and worse – we are on a one-way ticket to destruction of our Republic.

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The shrinking of the American middle class is painful to watch.  Shopping at the grocery store I’ve noticed more and more people with unique debit cards that don’t look like your typical debit or credit card.  These are actually the modern day food stamps and help to take away the stigma of pulling out a pile of paper coupons.  My anecdotal observations are confirmed by the data.  Since September of 2009 we have added a stunning 6,000,000 Americans to the nationwide food assistance program.  In fact, even as some are touting how great things are in the last month we added 521,000 more Americans to the food assistance program.  Let me reiterate, we added half a million Americans to the food assistance program in the latest month of data.  Is this really what we have in mind as a recovery?  The latest data shows 43,000,000 Americans now receive food assistance.  When we chart this data out it is rather startling.

You will notice that from 2000 onward the growth in food assistance participation has shot directly up:

Source:  SNAP

To put this in context, 13.8 percent of all Americans (1 out of 7) are now on some sort of food assistance.  If we go back to the deep recession of the 1980s the rate was slightly above 10 percent.  We are in all-time record territory here and the numbers just keep on expanding.  What is more troubling is many more Americans that were once in the middle class are being thrown out of their homes, losing their jobs, and finding themselves in the unfortunate spot of needing to seek food assistance.  An almost seamless transition from the American Dream to being one paycheck away from living in a car.  It isn’t for want of working.  Delta Airlines recently was hiring 1,000 flight attendants and had over 100,000 people apply:

“(ABC)  All this for a job where passengers are often rude, hours can be unpredictable and the starting salary is in the upper $20,000s. But flight attendants say they wouldn’t trade it in for any other job. (Delta’s flight attendants recently voted down a push to unionize.)”

As we’ve noted before, the chasm between the very rich and the poor has never been this big.  We would have to go back to the Great Depression to find similar income inequality.  72,000,000 wage earning Americans make between $0 and $25,000 per year.  The top 72 wage earners in the US in 2009 made an average of $84 million.  The stock market has certainly recovered but how much of an impact has this had on improving the economic prospects of typical Americans?  What we are seeing is a rather common attribute of many Latin American countries.  A stunningly wealthy upper crust of society and the large working poor majority.  The middle class is virtually non-existent.  Clearly we are nowhere near that given we are still the number one global economy.  Yet we have now put the car in reverse and the above chart of food stamp participation shows you where we are heading if we do not change course.

We can even see this split in purchasing behavior this holiday season:

“(WaPo) This holiday season, those two worlds have been thrown into stark relief: At Tiffany’s, executives report that sales of their most expensive merchandise have grown by double digits. At Wal-Mart, executives point to shoppers flooding the stores at midnight every two weeks to buy baby formula the minute their unemployment checks hit their accounts. Neiman Marcus brought back $1.5 million fantasy gifts in its annual Christmas Wish Book. Family Dollar is making more room on its shelves for staples like groceries, the one category its customers reliably shop.”

So you have the top of the top doing well once again and we have seen this with a resurgence of banking profits thanks to the generous taxpayer bailouts.  At the lower end, organizations like Family Dollar are doing well in a market that is finding many new customers.  Customers that may have once shopped at say a Target are going to lower priced places either out of necessity or out of a new sense of austerity.  In fact, we have seen the debt burden Americans carry decrease because of bankruptcies, foreclosures, and simply paying down debts:

The above would be better news if the major decrease was due to paying down already accumulated debts.  Yet the problem of course is much of this is happening via debts being written off (i.e., foreclosures).  But you have to ask what is happening at a deeper level here.  The once standard of the American Dream, owning a home is now being retracted and the blanket is being pulled slowly back.  Many Americans cannot afford to own a home because of an employment market that has been sold off to the global market over the past few decades.  Some of it is inevitable but a lot isn’t.  It is naïve to think that there was truly a need to bailout the banking industry instead of actual employment sectors that can give jobs to the 15 million unemployed Americans or the other 9 million who are working part-time but want full-time work.  It was also a giant banking pretense regarding toxic mortgages because Wall Street knew full well of the junk they were selling but wanted to milk the game as long as possible and once it blew up, it would hand over the hot potato to taxpayers.

The employment situation for households making less than $50,000 (aka half the population) is still deep in a recession:

“Economists say the biggest obstacle to a robust recovery is the high unemployment rate, which has hit workers with little education and low household income the hardest. The jobless rate for workers without a high school diploma is 15.7 percent – well above the national average and triple the rate for college graduates, according to government data. Meanwhile, the unemployment rate among households that had been making less than $50,000 is 15 percent, well above the national average of 9.8 percent, according to consulting firm Bain & Co.”

And this is reflected in the unemployment charts:

Where is the recovery?  It isn’t happening for working and middle class Americans.  The bailouts in fact where a methodical mechanism that shifted resources and money from the vast majority to the few at the top.  Many extremely wealthy organizations have earned their keep by fair competition.  Yet the banking sector has created the biggest moral hazard in this country with outrageous profits and bonuses that only exist because of the cronyism between Wall Street and D.C.  The fact that we are adding hundreds of thousands of Americans to the food assistance program on a monthly basis shows us the disappearing middle class.  That is why you don’t hear any economists or “analysts” on CNBC talking about the booming middle class.  You don’t hear about it because it isn’t happening.  In fact, they are too busy to look at how many of their fellow Americans are paying for daily necessities.

My Budget360

STOP THE LOOTING AND START PROSECUTING