FedUpUSA

After nearly four years in which I’ve outlined that I don’t believe the formalities of MBS securitization were followed, and two years of increasing evidence, despite intentional obstruction by OTS, OCC, the FDIC, The Fed and Congress, along with a rapidly-increasing number of court rulings that strongly suggest that I (and a few others) have been right while the naysayers are wrong, we finally have a law enforcement agency looking into this matter:

New York Attorney General Eric Schneiderman has targeted Bank of America, the biggest U.S. bank by assets, in a new probe that questions the validity of potentially thousands of mortgage securities and their associated foreclosures, two people familiar with the matter said.

The investigation, which began quietly in recent weeks, is part of a larger inquiry that is scrutinizing whether mortgage companies and Wall Street firms took the necessary steps under New York state law when creating mortgage-backed securities, these people said, who requested anonymity because they weren’t authorized to speak publicly about the probe.

There’s plenty of reason to ask these questions.  Like, for example, the court ruling that I cited last week.  Then there’s this ruling which just popped up as well, this time from the 9th Circuit in Arizona.

Again, the record shows that the note was not properly indorsed into the trust.  A late assignment was attempted but was judged legally defective.

Note, however, that this leaves open the question of what’s in the MBS box that the presumed holders of certificates which were issued against this obligation?

It appears, in this case and in literally hundreds of thousands of others, that these assignments are being made – whether legally sufficient at the time or not – well beyond the legal closing date of the trust involved.

That is, for the purpose of assigning interest they may (or may not) be sufficient to permit a foreclosure but as a matter of law and fact they cannot transfer the asset, in this case the note, into a trust that closed a year, two or even five years in the past!

The record in these cases is quite clear: When these fraudclosures are contested assignments “magically appear” (as opposed to being documented as having occurred contemporary with the creation of the trust in question) and often are dated on or near the date of the foreclosure proceeding.  This may be legal to effectuate a foreclosure but at the same time it documents that the MBS certificate holders bought an empty box since these assignments invariably are not from the Trust to a servicer or institution for the purpose of foreclosure and recovery (perfectly legal) but rather are typically from the originator to the servicer, documenting that the transfer that was supposed to have taken place years previously did not as a matter of both law and fact.

Well folks?  You can’t have this both ways.  If the legal formalities of NY Trust Law (and IRS REMIC requirements) were complied with then what should be presented to the court is the original or a certified copy of the original assignment chain that took place into the trust prior to its closing date.

I challenge you to find documents evidencing these alleged transfers.  What I keep seeing in these cases, in virtually every contested case I’ve seen, is instead a transfer that purports to grant the rights in the mortgage to the servicer-cum-foreclosing party from the originator on or about the time the foreclosure is filed.

The problem is that the originator was paid within days of the issuance of the mortgage and according to NY Trust Law had to indorse and tender that note to the Securitizer, who then had to tender it to the Depositor, and who then was supposed to have tendered it into the trust.

Well?

***and***

In a series of pieces I have argued that MERS, a creation of the mortgage banking industry, has effectively destroyed the institution of private property in America. See here. Ironically, MERS was created to facilitate quick and easy and cheap securitization of mortgages—what are called mortgage-backed securities. In fact, what it did was to eliminate any backing of the securities by mortgages. Of the total securitized asset universe, something like $7 trillion are (supposedly) backed by residential mortgages. However, MERS helped to delink the securities from the mortgages. At best, they are unsecured debt—there is no property backing the securities. What this means is that foreclosure is not permitted. As I have said before, it is likely that most or even all foreclosures occurring in the US are illegal seizures of property—home thefts. We are talking about 100,000 completed home thefts per month, with another 250,000 new foreclosures started to steal homes every month. Projections are that 13 million homes will have been “foreclosed” (read: stolen) by 2012.

Worse, from the perspective of the banks, they’ve got to take back all the fraudulent MBSs, most of which are toxic.

In what follows I want to present the most favorable case for the mortgage industry. That is to say, I will ignore fraud and criminal conspiracies. Let us look at the current predicament as if it resulted from a series of monumental errors. With that in mind, what is the best-case scenario? First a caveat: I am not a lawyer nor am I an investigative reporter. I have relied on my perusal of reported evidence, plus a discussion with James McGuire who has put together an entirely convincing argument that the securitizations of mortgages resulted in securities that are not backed by mortgages. I urge interested readers to go to his website.

With that caveat, let us work through the problems now facing the banks.

1. A valid “mortgage” requires a (“wet signature”) note and a security instrument; these must be kept together, and any subsequent transfer of lien rights to the security instrument must be recorded at the appropriate public office. The mortgage note must be properly indorsed each time the mortgage is transferred. In the era of securitized mortgages this can be a dozen times or more. If ever presented for foreclosure, endorsements should demonstrate a clear chain of title, from origination through to foreclosure; and this should match the records at the public office.

2. MERS intended to provide an electronic registry of all mortgages. By appointing a “vice president” in every financial firm, it believed that all transfers of lien rights among these firms were “in house”. Hence it operated on the belief that no subsequent public recording was necessary, and no further endorsement of the mortgage note was necessary for in-house transfers of the payment intangible as it kept a record of transfers of the mortgage. It claimed to be a nominee of these firms (purported to hold the mortgage) but also to be the holder of the mortgages including the “Unidentified Indorsees In Blank”—mortgages that were never properly endorsed over to purchasers. We know, however, that MERS recommended that mortgage servicers retain notes, so MERS’s claim to be the holder rests on its claim that appointed VPs are employees. But these employees are not an agent/employee of the “Unidentified Indorsee In Blank”, nor are they paid by MERS or in any way supervised by MERS.

3. This practice is in violation of numerous laws. Property law requires filing sales in the public record. Notes must be affixed (permanently) to the security instrument—a mortgage without the note has been ruled a “nullity” by the Supreme Court. MERS’s recommended business practice (with the servicer retaining the note) would make the mortgages a “nullity”. A complete chain of title is required to foreclose on property—every sale of a mortgage must be endorsed over to the purchaser, and properly recorded. Without this, it is illegal to foreclose on property—no matter how many payments the homeowner has missed.

4. However, if the notes can be found and if MERS can provide records, it is possible that the mortgages can be made valid (“proved up”) for purposes of collecting upon the indebtedness, but foreclosure would not be possible without a valid continuous perfected mortgage showing a chain of title from origination through to the current party trying to enforce the mortgage note. Any break in the chain of indorsements along with any break in the chain of title renders the Power of Sale clause in the security instrument to be a nullity and therefore no party can foreclose on the real property. So long as there is no fraud affecting the mortgage note, then rights to enforce the indebtedness can be further negotiated. If there is no break in the chain, when fraud is shown affecting the security instrument (such as robosigners, etc), this does not affect the rights to enforce the mortgage note–but such fraud will affect the validity of the security instrument perhaps making foreclosure impossible. Fraud affecting the mortgage note would affect the right to foreclose.

5. If the notes cannot be found and a Lost Note Affidavit can not reestablish the indebtedness, then foreclosure is not possible and collecting of the indebtedness is also not possible. Homeowners still can be sued for collection of owed moneys upon a “proved up” note or lost note affidavit but a current perfected lien is required to foreclose.

6. However since the mortgage-backed securities are governed by PSAs (pooling and service agreements), the practices above make the securities unsecured debt and there is no solution. The securities are no good. (This would be a Representation & Warrant violation as the MBSs stated that a secured indebtedness was to be purchased, but since the Trustees of the securitization would not have the notes, the securities cannot be “secured”.)

What does all this mean? In plain simple language, the banks are royally screwed. They cannot foreclose on the properties. Holders of the “mortgage-backed” securities can turn them back to the banks because they are actually unsecured debt. In previous pieces I have also explained why MERS’s recommended practice also violates US tax code—so back taxes are owed. And we know that the mortgages stuffed into the securities did not meet the “reps” of the PSAs.

So, in short, banks have got to take the whole lot of toxic waste securities back. Trillions of dollars worth. The banks are toast. There is no cooking of the books that will turn this blackened toast back to bread.

About the author:  L. Randall Wray is a Professor of Economics, University of Missouri—Kansas City. A student of Hyman Minsky, his research focuses on monetary and fiscal policy as well as unemployment and job creation. He writes a weekly column for Benzinga every Thursday.

He also blogs at New Economic Perspectives, and is a BrainTruster at New Deal 2.0. He is a senior scholar at the Levy Economics Institute, and has been a visiting professor at the University of Rome (La Sapienza), UNAM (Mexico City), University of Paris (South), and the University of Bologna (Italy).

BenZingA

We may be about to find out.

The number of deals the RMBS Investor Clearing House now has a big enough interest in to request action by bond trustees has climbed about 30 percent since a July statement by Franklin. The clearing house allows bondholders to coordinate without divulging to each other which securities they own.

The group added three new portfolios Nov. 12 that weren¡¯t included in the most recent total, Franklin said in an e-mail from Dallas that day. A quarter of bond investors in any single deal marks the minimum threshold to force mortgage-bond trustees to grant access to loan files that may help investors prove mortgage sellers should buy back bad debt or take other action.

Remember, the allegations made by various legal folks in the practice (and apparently validated by the case law thus far) is that not one note has been able to be produced that contains all of the required conveyances and endorsements.

What’s going to happen when (or if) these folks gain access to the files and find that they’re missing – that is, that the custodian doesn’t have them?

Well now that would be interesting, no?  “Mortgage-backed securities” that in fact have no mortgages in them?  Why that would be a wee problem, no?

Everything we know up to this point strongly suggests that this is exactly what is going to be discovered, and as a consequence, the RMBS Investor Clearing House is definitely an entity to watch.

The wheels of justice turn slowly, but they do turn, and if in fact basically none of these notes have been properly conveyed into the trusts, and as such the trusts are a legal nullity, then investors have spent billions of dollars as unknowing participants in a massive fraudulent scheme.

There is a very important audio interview on KOH that you need to listen to.

It’s two hours, and that’s a lot.  But it’s important.

In particular, listen to the couple of minutes starting at 12:30 in.  Then listen to 6:30, and 42:30, right around 50:00 and then again at 70:00 and finally, at 78:00 in.

Pay attention to what’s being said here. 

First: The assertion is made that the lenders and holders of the notes were paid in full.  That is, they have no economic damage from the default (!) due to the way they structured the deals.

Second: The assertion is made that there was fraud in the inducement in all of these loans, in that there is an implied duty of dealing in good faith in all contracts that was violated by the banks that made knowingly bad loans – which we now have sworn testimony on.  While this is not settled by any means, there is currently pending litigation on this point, and if this approach wins, well, then you go – those contracts are voidable.

Third: The allegation is made that the banks were not stupid – they knew the mathematics (as we all do now) and intentionally crashed the market.  That just compounds the second point.

Fourth: MERS has given sworn testimony that they have no economic interest and have nothing to transfer.  Oh wait a second….. then how the hell do they transfer a deed they don’t have (even though they’re listed as Mortgagee) to someone who then forecloses – or alternatively, forecloses themselves on behalf of someone else?

Incidentally, FDN has picked up on this too.  Don’t expect the entire “fraud in the inducement” line of inquiry to remain quiet for very long, and again, if this wins at trial – even once – you’re gonna get this:

The MERS problem is also outlined in a rather long and exhaustive paper in the Cincinnati Law Review.  The salient point is here:

With these services on offer, the mortgage finance industry quickly and wholeheartedly embraced recording and foreclosing its mortgage loans in MERS’s name, rather than the actual parties in interest. Instead of legislation or a landmark court ruling, mortgage industry insiders report that the key development in the acceptance of MERS was the endorsement of credit rating agencies such as Moody’s, Standard and Poor’s, and Fitch Investment. 71 For example, in 1999-before any significant appellate judicial opinion on the subject-Moody’s Investors Services issued a report concluding that MERS’s mechanism to put creditors on notice of a mortgage would not be harmed. 72 Moody’s concluded without citation to any court opinion, or even to any state recording statute, that “subsequent creditors of the entity selling the mortgages to the MBS [mortgage backed securities] transactions [sic] should not be able to contest the conveyance of the mortgages based on lack of notice. 73

Got that?

The agencies concluded without any legal justification whatsoever that this was all ok.

Since when does a ratings agency trump State Law?

There’s been an awful lot of flip-flopping on many of these points in the last week.  In particular, you’ve got people who were all over the fraud side of this that suddenly got very quiet.

One wonders why – and note, it’s not that they’re repudiating what they formerly said, it’s that they’re saying nothing at all, and some are now trying to throw this back on the borrowers, making all sorts of claims of “unethical” behavior on their part.

Let me be clear on my position: This entire bubble was predicated on fraud – up and down the line.  I’ll simply quote Bill Black, since he’s more concise than I can be:

Nothing short of removing all senior officers who directed, committed, or acquiesced in fraud can be effective against control fraud. We repeat: Foreclosure fraud is the necessary outcome of the epidemic of mortgage fraud that began early this decade. The banks that are foreclosing on fraudulently originated mortgages frequently cannot produce legitimate documents and have committed “fraud in the inducement.” Now, only fraud will let them take the homes. Many of the required documents do not exist, and those that do exist would provide proof of the fraud that was involved in loan origination, securitization, and marketing. This in turn would allow investors to force the banks to buy-back the fraudulent securities. In other words, to keep the investors at bay the foreclosing banks must manufacture fake documents. If the original documents do not exist the securities might be ruled no good. If the original docs do exist they will demonstrate that proper underwriting was not done — so the securities might be no good. Foreclosure fraud is the only thing standing between the banks and Armageddon.

There’s only one solution to all of this: Take all of the big banks into receivership.

Force these securities to be examined, those with fraudulent originations beyond their specifications to be unwound and put back on the securitizers.

This will detonate them.  Since they’re in receivership, their stockholders will wind up wiped out and their bondholders will take the hit as they are crammed down into equity.

Where intentional fraud is found in the inducement, as has been alleged by Citibank’s former chief underwriter in over 80% of production for 2007, people need to go to prison.  A lot of people.  And while this does not necessarily mean “free houses” it sure does mean recission of the deal – and if that winds up forcing renegotiation of the terms (including principal), then so be it.

The more time goes on the deeper this rabbit hole gets and the more fraud we find evidence of.  Contrary to the professed claims in the media, this is not getting clearer and headed more toward “clerical errors” - it is headed more toward the entire financial system being one gigantic pyramid of fraudulent transactions layered upon each other, none of which were unwound during the so-called “bailouts.”

Instead, it appears that government decided to attempt to perpetuate the debt and fraud ponzi schemes – likely because, arithmetic or not, they knew that letting it all into the light of day would mean incalculable and insatiable demands for prosecution – at least figurative if not literal heads on pikes.

If you think the idiocy and downplaying of reality is limited to the bankster apologists on CNBS, you’re wrong.  We also can look to Housingwire, which put forth a pure fantasy piece that included the following:

The real fact is that the ‘robo-signing’ scandal is a procedural one, albeit one that offends the very nature of due process.

….

The injured parties from this gross abuse of process are limited to the court, who has seen its rule of law mocked; and potentially investors, who must ultimately pay for the added time and expense of re-filing.

Forgery is not a “procedural issue.”  It’s a felony act of perjury.  Mocking the rule of law is not a procedural matter – it goes to the very heart of our legal system, not to mention The Constitution.  There is this pesky thing called The 5th Amendment.  I know that the mortgage and housing industries think that such matters lack substance in this case but I’m quite sure that if the people decided to start stringing up lenders, bankers, and builders from lampposts en-masse, they’d change their tune about “procedural issues” and due process rights in a big damn hurry.

Within minutes of the ‘robo-signing’ scandal, seemingly, commentators were giving credence to long-standing claims regarding the validity of MERS as a foreclosing party, who really owns the note, as well as highlighting put-back risks — a span of issues that are distinctly and utterly separate from the procedural challenges encompassed by ‘robo-signing.’

Nonsense.  The entire “robo-signing” thing is part and parcel of the industry’s inability to produce factual documentation right up front.  There are only two reasons not to produce the original paperwork, properly endorsed, instead of all this robo garbage:

1. You don’t have it because you never got it, and you’re trying to cover that up.

2. You don’t have it because you intentionally destroyed it or are hiding it, as producing it would document that you did something fraudulent earlier on in the process (like at origination, for instance), and you’re trying to cover that up.

In short, there is no other explanation.  A few lost pieces of paper here and there?  Sure.  A system that can’t produce any of the paperwork, properly endorsed over?  That’s not accident – it’s an intentional act.  Period.

In other words: massive GSE putbacks? Yes. Massive private-label putbacks? Eh, probably not so much. In either case, however, hardly does this seem to be the sort of end-of-the-world scenario that so many have painted recently.

Really?  Remember, Lehman wasn’t so much the end of the world for Lehman per-se, as it wasn’t that big a firm.  Rather it was the cascading credit default exposure that everyone was worried about.

Does anyone recall us actually fixing that by forcing it all onto regulated exchanges, where margin was maintained on a nightly basis so we know that everyone’s good for the crap they’re holding?  Oh, I seem to remember that didn’t happen.

Funny how everyone forgets that the nuclear device that started all this crap is still sitting on the board room table, it’s still ticking, and someone still has tape over the timer window so nobody can see how many more “ticks” we’ve got.

The real brewing issue in the markets currently — and quietly — is one of investor confidence, borne most lately of horrible remittance reporting. Investors have had it with inaccurate reports from servicers, and some are threatening to ditch MBS markets altogether.

Getting lied to repeatedly has a way of doing that.  You know, things like Clayton being revealed to have done diligence on these loans and finding them bogus, but then having them shoved into the securities anyway – without disclosure to the buyers.  Or Citibank’s chief underwriter stating under oath that eighty percent of production violated reps and warranties in 2007.  Eighty percent?!  Then you add stiff-arming to this by the securitizers for the original loan data.  Gee, I wonder why they wouldn’t want anyone to look after their own people testified that they packaged up loans they knew were dogcrap and sold them on to investors!

The third real issue facing mortgage markets today, quite frankly, is that political reality is allowed to subsume actual reality. This is the outcome that sees the mortgage industry eat its own, if it comes to pass.

In a word, bullshit.

The “industry” should eat its own.  What integrity does a fraud-laced process have?  What sort of weight does someone who refuses to disclose what they did earlier on to a buyer command with a new buyer?  Zero, that’s what.  Getting rooked once is a bad thing.  If you get rooked twice it’s your own fault for trusting someone who has proved, through their own conduct, that they will fuck you as long and as hard as they think they can get away with.  That is, buyers of these securities appear to now know for a fact that they were sold crap on purpose without proper disclosure. 

None of these banks has any reason to expect that any of these buyers would ever do business with them again under any set of terms or conditions.  In fact, this alone ought to be enough to put them all out of business – permanently.

The reality here is that what we have is a bunch of piranhas in a tank that have been feasting on Americans for two decades.  Now the Americans are down to bare femurs, tibia, fibula and ribcages – they’re out of assets to strip and out of payments to poach. 

So now we get to the fun part, where the ravenous piranha, devoid of any sense of ethics and willing to eat literally anything, turn on their buddies and start tearing them apart.

After seeing Americans stripped like a turkey leg, I’m looking forward to this part of the show.