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The Wheels Are Coming Off in MBS Land: All 50 State AGs Join Probe; Banks Abandoning MERS Foreclosures

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I get on an airplane, and there are more dramatic developments by the time I land.

Even though the headline item is the fact that the attorneys general in all 50 states are joining the mortgage fraud investigation, the real indicator that the banks are stressed is that they have started abandoning MERS, the electronic database that passes itself off as a registry for mortgages. JP Morgan has quit using it as an agent on foreclosures; it clearly can’t withdraw from it fully, given that it has become a central information service.

Despite this being treated as a pretty routine event in the JP Morgan earnings call, trust me, it isn’t. The withdrawal of JP Morgan from the use of MERS as the face in foreclosures is a tacit admission that the past practice of using MERS as the stand -in for the trust is problematic. I’ve heard lawyers discuss the possibility of class action litigation to invalidate all MERS-initiated foreclosures in states with strong anti-MERS rulings; this idea no doubt will get more traction given JP Morgan’s move. (An attorney who is in the thick of this situation told me another major bank has made the same move as JPM, but I see no confirmation in the news as of this writing).

The triggers for the sudden escalation appear to have been the release of a research note by Citigroup which included a grim assessment (which we did not consider to be dire enough) by Professor Levitin to Citi clients on likely path of the mortgage crisis. This was no doubt compounded among the cogoscenti by the research note published by Josh Rosner, that most if not all notes (which are the borrower IOU in a mortgage) were endorsed in blank, which creates near insurmountable problems in foreclosure, worse even for the RMBS ownership of them as de facto mere unsecured paper.

But the stunner is the withdrawal of JP Morgan from the purported mortgage registry system, MERS. 60% the mortgages in the US are registered through MERS, and not at the local courthouse as was the long established, well settled custom in the US. Countries that have moved to central databases (such as Australia) have them operated by the government, and they are transparent and run with sound standards of data integrity. As noted, banks like JP Morgan can’t fully withdraw; MERS has become too integral, but its announcement is an admission that all is not well.

The fact that major MERS members are suddenly resigning from MERS is a sign that tectonic plates are moving. MERS has become central in mortgage securitization; Freddie and Fannie have required its use since early in this decade.

From the Associated Press:

JPMorgan Chase’s CEO says the bank has stopped using the electronic mortgage tracking system used by major financial institutions.

Lawyers have argued in court proceedings that the system is unable to accurately prove ownership of mortgages.

JPMorgan Chase & Co. and other banks have suspended some foreclosures following allegations of paperwork problems in thousands of cases.

The trigger may have been the publication of a simply devastating analysis at the end of September, “Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory” by Christopher L. Peterson. Even though I have read the critical MERS unfavorable opinions, this is the first time I am aware of that someone has looked at the operation of MERS from a broader legal perspective. It finds fundamental flaws in virtually every aspect of its operation. To give a partial list: the language used by MERS in its registry at local courthouses is contradictory (it claims to be both the owner of the mortgage and as well as a nominee; legally, a single party can’t play two roles simultaneously), rendering it unenforcable; MERS has employees of servicers and law firms become “MERS vice presidents” or secretaries when fit none of the criteria that fit those roles, and also have clear conflicts of interest given that they are also full time employees of other organizations; MERS record keeping has the hallmarks of being poorly controlled (there have been cases of mortgages basically being stolen from other MERS members; some contacts have suggested that a single MERS member can assign a mortgage, meaning checks are weak; MERS members are not required to update records). And most important, every state supreme court that has looked at the role of MERS has ruled against it.

As much as I have heard the case against MERS in bits and pieces, and regarding it as very problematic, seeing it assembled in one place (with solid references to judicial decisions) makes for a overwhelming case. The best resolution the author can come up with is that lenders with MERS registered mortgages would be granted an equitable mortgage as a substitute for the flawed MERS registered mortgages:

While awarding equitable mortgages is surely a better approach for financiers and their investors than simply invalidating liens, it would not solve all their problems. Replacing legal mortgages with equitable mortgages would give borrowers significant leverage. Historically, state law has not uniformly treated equitable mortgagees vis-à-vis other competing creditors. Generally, the holder of an equitable mortgage had priority against judgment creditors. But, it is likely that an equitable mortgage could be avoided in bankruptcy. Moreover, it is likely that financiers would have less luck seeking deficiency judgments when foreclosing on equitable mortgages.

In Florida, the so-called rocket docket has apparently slowed to a crawl, between some banks suspending foreclosures and at least some judges starting to take borrower allegations of fraud seriously. From Bloomberg:

Home to more foreclosures than 47 U.S. states, Florida sought to clear out its backlog with a system of special court hearings that dispensed with cases quickly, sometimes in less than a minute.

Homeowners like Nicole West now threaten to slow that system, Florida’s so-called rocket docket, to a crawl. West, who has been fighting to save her Jensen Beach house from foreclosure, has leveled a new allegation in her three-year battle: the entire process is based on fraud.

West said her case is rife with the kind of flawed mortgage documents that have caused lenders including Bank of America Corp. and JPMorgan Chase & Co. to stop the process of foreclosures and evictions across the country. The banks said they are investigating homeowner charges like West’s that signatures were forged and documents were backdated…..

The bank moratoriums are already thwarting the initiative by Florida officials to clear jammed court dockets. Now, efforts by homeowners such as West to bring claims of fraud to the attention of judges are further prolonging evictions, and in turn slowing purchases of foreclosed properties.

The focus so far has been on what the foreclosure mess means for borrowers. Not enough media attention has been given to the implications for the major banks, particularly their trust businesses, and RMBS investors. Neither the facts nor the law are on the financiers’ side, but they are either in denial or doing a full bore job of obfuscation.

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114 comments

  1. BS

    Just wondering…

    If this goes beyond robo-signing….into MERS and who actually owns the mortgage….

    won’t that also cloud non foreclosure mortgages that exist in the system too?

    Someones refi? Selling?

  2. Mogden

    My mortgage originator resold my mortgage to a TBTF bank a few years ago. Do they really hold my mortgage? Have I been making payments into a black hole? Should I continue to pay my mortgage?

    1. Yves Smith Post author

      Have you been following this story? The facts coming forward have consistently been at the worst end of the range of where things could actually lie.

      Team Obama is engaged in extend and pretend. Having the President and Turbo Timmy act as your mouthpieces means the market can stay in denial for a while. The traders are all enamored of QE2, but the mess in the biggest asset class in the world is going to leave too much collateral damage, starting with the impact on the major TBTF banks as trustees and servicers, for there to be a happy ending.

      The gridlocking of the Florida rocket docket says we still have enough of a judicial process in the US to prevent the banks from steamrolling their way through this one.

      The wider world hasn’t yet worked through what this means. And some sites that are very much aligned with the industry are running its talking points.

      Insiders knew CDOs were worth zero as of year end 2007. It wasn’t until the monster S&P downgrades in June 2008 that the rest of the world woke up. and it took another two months for the damage to produce an implosion.

      Denial can persist in markets for some time, but every development thus far indicates that the banks have a serious problem and they are being forced to take radical measures (like suspending foreclosures, and withdrawing from practices that were standard ways of doing business a mere two months ago.

        1. john bougearel

          Emiliano has no concept of investor anchoring bias which as Yves points out, can remain in denial for quite some time and be significantly higher than where it is today a few months hence simply because the mouthpieces, combined with QE and the bullshit NBER and Geithner “welcome to the recovery” story line that suckers a few believers in here.

          Yves observation that RMBS and CMBS are the biggest asset class in the world should be worrisome over the longer term time frames for stock investors watching the ticker tape.

          A close observer would note that BAC (the financial with the worst exposure to the crimes by virtue of the fact that their omnipotent CEO Ken Lewis saw fit to buy the worst actor in the subprime space, CFC back in Aug 2007 and Jan 2008)is radically under performing JPM and the broad mkt since September. How poor Emiliano failed to see this under performance is impossible to know. I promise you this, plenty of long/short funds are pairing BAC short against other not so bad actors in the financial sector.

          Astute investors that want to know if this foreclosure fiasco might blow up on the financial sector, and shall we say BAC in particular, you might want to keep an occasional eye on BAC’s stock price as being a leading indicator.

    2. Doug Terpstra

      Amazing. The stock market seems quite unhinged from reality. Either that or the Fed is “buying” stocks directly and Congress is lined up for yet another ‘extra-constitutional’ bailout for this “little rough patch”. State capitalism, aka fascism, can surely dispense with such trvial paperwork glitches.

      From free market champion Greenspan: “Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity — myself especially — are in a state of shocked disbelief.” (October 23, 2008)

      1. Justicia

        I wouldn’t be at all surprised if the Fed is keeping a floor under the market. Remember the “plunge protection team”?

        Plunge Protection Team
        By Brett D. Fromson
        Washington Post Staff Writer
        Sunday, February 23, 1997; Page H01
        The Washington Post
        http://www.washingtonpost.com/wpsrv/business/longterm/blackm/plunge.htm

        Found this link on Washington’s blog to Jamie Galbraith’s talk to Canadian unions in which he calls it a fraud a fraud:

        http://rabble.ca/rabbletv/program-guide/2010/10/features/dr-james-k-galbraith-cep-convention-2010

    3. wjs

      I wouldn’t look at just equity prices for verification. While Yves may not care for the CDS market it does tend to give signals ahead of equities. CDS spreads of firms with mortgage putback risk were substantially wider today especially RESCAP & HRB (mtg exposure via Block Financial) as well as BAC/MER, Wells, and GMAC. I would expect you might start to see this show in their equity prices soon.

    4. TC

      @EmilianoZ: I suspect you will be singing a different tune in no time, even days. The banks are pulling the plug, attempting to hasten further contraction and consolidation that, alone (along with hefty backing from Washington), might allow their continuance as going concerns resembling their present state.

      As for the stock market, we are looking at a decade-and-running distribution (from strong hands to weak) whose most recent leg has been completed during the market’s advance off March ’09 bottom. There is a case to be made, too, suggesting that equity’s distribution is done, and so an “unimaginable” collapse very well could be at hand.

      Rome wasn’t built in a day, nor are positions rapidly established, such as venture to preserve capital during a prospective unraveling whose risk quite evidently is rising astronomically. This, I submit, is precisely what has been happening since March ’09 and the final days of positioning for a major storm are at hand.

  3. Cedric Regula

    OK, so MERS is a criminal organization, and worse yet, they have crappy database programmers. Anywhere I ever worked, they made us program automatic audit trails, linked to whomever made the change via logon security level. I also doubt that management ever handed out anything but read only permissions to people outside the company. Any change control needed collaboration from someone in the organization.

    Shocking.

    1. Yves Smith Post author

      Go read the article I linked to. Everything I have heard from industry indicates that a single MERS member can assign a mortgage. The article cites litigation that is consistent with that. That isn’t proof, I agree, and I will tone down my comments in the post, but consider this:

      In its complaint Diversified alleges that MERS may have allowed trading partners of Diversified to list themselves as owners of Diversified’s loans without permission from Diversified. When the lender asked MERS to produce a list of all Diversified’s trading partners that may have claimed to own some of Diversified’s loans, MERS either could not or refused to do so. ….Eventually, Diversified learned that other third party financial institutions had initiated foreclosure proceedings on mortgages that Diversified believed it owned

      This could happen only with a system with inadequate controls or via collusion of parties who had access.

      I’ve had CIOs and systems architects as clients, and I’m aware aware of how stunningly bad the MERS processes seem to be. Just read how their corporate governance works too, that from a parallel lawless universe.

      This is stunningly bad:

      MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each

      1. Cedric Regula

        I wasn’t trying to be sarcastic. (I know that can be difficult to tell with me)

        If what is charged is true, then they do have criminal management, and very crappy database programmers.

        One of the key features of relational database design, is you can design them so one loan can only have one owner. If they didn’t do it that way, because of some other design trade off, it is exceedingly simple to generate “management reports” that would show if a loan had two owners. It would take all of three minutes, plenty of time to prove your innocence to a prying public or government.

        Then the change control procedures do sound like it needs work.

        1. Cedric Regula

          Of course this looks like another major failing in our regulatory net over the FIRE industry.

          Someone could send in IBM or any other business system consulting firm to evaluate and make changes to the system design, reporting, auditing, and security.

          But first it would be wise to get the core legal questions extraneous to the system answered, because programmers know they can bill their hours in parallel with lawyers, then start all over again whenever the lawyers finish.

      2. steelhead23

        Just today, Mr. Ben Bernanke assured the National Community Reinvestment Coalition that the Fed would pursue “appropriate remedies relative to document signing and MERS issues.”
        http://www.reuters.com/article/idUSTRE69C5KO20101013
        Dear Mr. Bernanke, Sir, would you please sit down and shut up! You have no authority to try to fix this. Indeed, as the Fed has purchased a substantial amount of MBS (extralegally I would argue) you are likely a victim of fraud. If you wish to pursue this issue from that perspective – great. Go talk to Obama and get Mr. Holder to immediately convene a grand jury and go after these crooks. Otherwise, please don’t do a damn thing.

        1. Cedric Regula

          Not so. Ben has officially become our Systematic Risk Regulator, after he, his predecessor, and minions of Fed economists and governors didn’t do what was their job previously(they are the TBTF bank regulator).

          The only open questions are does the Fed know what Systematic Risk is, and what a Systematic Risk Regulator does?

          1. Glen

            I solemnly promise that if he loans me a billion bucks at 0.2%, I will pay it back (by buying T-bills at 3% and clipping coupons for the rest of my life.)

            Hey, look, I’m a brilliant banker!

      3. Michael

        ASF Submits Request to Treasury, IRS re REMIC Changes on October 8, 2010

        I didn’t recall – maybe missed an explanation on this — cannot post the links but the timing of all this as per usual seems to me highly suspect.

        Did not know how else to contact you.

        LPB – mike

  4. sandorgb

    http://www.rcwhalen.com/pdf/aei_1010.pdf

    Chris Whalen of IRA came out last week and predicted the 3 largest US Banks will have to be taken into receivership in the next 6 months. The market has become anesthetized to TBTF believing Feds have created an implicit put on risk assets. Regardless, when these banks are in fact recognized as insolvent, there will be no TARP 2. If this scenario plays out, it has dire implications for US equities markets in the next 6-9 months.

    Can the Fed’s money printing outrun debt destruction? That is the fundamental calculation driving risk assets which, after all, are priced in dollars. As long as nominal prices are maintained, losses will not be recognized. Even as the real wealth of the country erodes, the Fed can have their beloved “price stability” of +2% and mimic real wealth with the illusion of large numbers. Rising gold is only good news for those making leveraged bets via futures or miners. Nobody wins in this scenario except a handful of traders and their allies. There is no safe haven other than awareness.

    1. Francois T

      Chris Whalen gives an explanation about probable receivership in this video here:

      http://xrl.in/6i3k Video starts at 01:07:00.

      His whole presentation is worth listening too. The last 4 minutes also contains a real doozy: The DOJ should sue the 5 biggest banks for cartel behavior in the mortgage refinancing in the US, instead of pouncing on Amex for what amounts to a tempest in a cup of tea. Of course, as long as Turbo Tax Timmy and Larry Summers are around, this will not happen. I don’t even think Obama would have the kahunas to do it anyway so…

    2. Diogenes

      While I generally find Chris Whalen’s comments to be insightful and relevant, I couldn’t help rolling my eyes when I came across the following point in his October 6 presentation to the American Enterprise Institute which sandorgb linked to:

      Failure by the Obama Administration to restructure the largest banks during 2007‐2009 period only means that this process is going to occur over next three to five years –whether we like it or not.

      While I would be just about the last person to give Team Obama even an iota credit for doing the right thing in response to the challenges the banking crisis has presented, I think Chris Whalen may have over-reached just a tad in also holding them responsible for the decisions made by the Bush administration during 2007 and 2008.

      1. Still Above Water

        Let me explain by way of analogy:

        Let’s say a bunch of arsonists (the TBTF banks) start a huge fire (the GFC). Fireman #1 (Bush) does nothing about the fire, but moves the arsonists to a luxury hotel (TARP). Fireman #2 (Obama) comes on at second shift. He’s got a gleaming new fire truck with a hose and a huge tank of water (political capital). Instead of putting out the fire and jailing the arsonists, he plays fiddle while making sure the arsonists have the very best in room service.

        Why on earth would you think that it’s all fireman #1′s fault? Fireman #2 is standing there with the hose, refusing to use it. Meanwhile, his tank is getting emptier by the day. If he doesn’t use it fast, we’ll waiting for fireman #3 (Palin), who will probably show up with a tank of gasoline rather than water.

        1. ohmyheck

          “Why on earth would you think that it’s all fireman #1’s fault?”

          Well, if this is the same “Diogenes” that I am familiar with, she is an Obama Fan/Apologist from DailyKos, and this is one of the standard lines that they give…Obama can do NO WRONG. EVER.

          I may be wrong, there a plenty of “Diogenes” usernames out there, but that would answer your question.

      2. attempter

        It’s also either ignorant or a lie to absolve Obama even of 2008 action. Candidate Obama aggressively whipped for the TARP.

        So it’s not just figurative, but precisely correct in detail, to call not just the Bailout in general, but even that specific 2008 part of it, the Bush/Obama Bailout.

        And of course the whole trend of this great crime reached maturity under Clinton, with Rubin and Summers its two main specific drivers. Obama then willingly became Rubin’s protege, which confirms his complete endorsement of the entire chain of events going back to the inception. His appointment of Summers and Geithner was merely the first official act of the presidental-elect affirming that. But the actions of senator Obama and candidate Obama present a clear record of pro-bankster criminality unblemished by a single public interest action.

        So it’s not only complete nonsense to say anything like “Obama inherited the crisis from Bush”, since he affirmed every aspect of it retroactively; it’s also not even technically true that he was handed anything of which he wasn’t part-owner all along. Senator Obama was part owner of the entire catastrophe already in 2008, already prior to the TARP.

        And senator/candidate Obama was a full partner with Bush, Paulson, Pelosi, and others in the TARP project in particular.

        1. Doug Terpstra

          I’t can’t be stated more clearly.

          The “professional left” whose salary depends on the status quo, is a ‘victim’ of Stockholm or spousal abuse syndrome. They aid and invent endless excuses for their captors and cannot free themselves no matter how great the pain or dire the threat.

          For this reason, Obama and the Democratic Party are more deadly for the complacent middle-class frogs, hypnotized by the basilisk. Better a naked wolf than one dressed in wool. “Beware…by their fruits ye shall know them”. Obama’s fruit is poisoned.

    3. Robert Dudek

      Everyone should get used to measuring their net worth in ounces of gold. Only then will people really understand what kind of destruction has occurred.

  5. moslof

    Would love to be a fly on the wall at the Augusta National this weekend when all the major bank CEO’s get together for some golf and their annual mid October “opening” meeting/party. There will be some interesting conversation during the cocktail hour. The atmosphere will be similar to a salmonella infested egg farm.

  6. rapier

    This terribly bearish outlook make perfect logical sense. However let’s remember what Karl Rove said.

    The aide said that guys like me were “in what we call the reality-based community,” which he defined as people who “believe that solutions emerge from your judicious study of discernible reality.” … “That’s not the way the world really works anymore,” he continued. “We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality—judiciously, as you will—we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors…and you, all of you, will be left to just study what we do.”

    The TBTF banks cannot go down because they are an existential necessity for The Nations existence. No group of a few thousand lawyers and a few hundred judges are going be allowed to force the banks into insolvency. Some new reality will be created to supersede the current one. Admittedly it will have to be an extreme one. War perhaps.

    1. ChrisPacific

      “No group of a few thousand lawyers and a few hundred judges are going be allowed to force the banks into insolvency.”

      Just nine judges would be enough, if it was the right nine.

  7. i on the ball patriot

    Thanks Yves for all of your hard work!

    Deception is the strongest political force on the planet

  8. Texas Reader

    I’m not happy about it, but I think Rapier is correct with this statement “No group of a few thousand lawyers and a few hundred judges are going be allowed to force the banks into insolvency. ”

    Obama has been a huge disappointment – he should have told the stockholders of those “TBTF” banks that in order to get bailed out and feed at the Fed window at zero percent they had to let their sr managers who failed at their jobs go, and without golden parachutes.

    Bush wouldn’t require accountability, and neither will Obama.

  9. dladow

    Yves, I just ran across this blog at http://www.subprimeshakeout.blogspot.com that deals with the legal side of the RMBS market and did not know if you are aware of it. Check out this post from June 15 2010 describing an investor syndicate forming to take over the trusts and replace the trustees and servicers. http://subprimeshakeout.blogspot.com/2010/06/investor-syndicate-at-hundreds-of.html

    It seems this is still a work in progress as they attempt to reach a critical mass sufficient to overcome the onerous procedural burdens that the investors must satisfy to achieve their goal under the PSA’s. As they say, the plot thickens.

    1. Jackrabbit

      FYI I read somewhere that some of the Federal Home Loan Banks (FHLB) were suing to get their money back also.

  10. cheale

    Actually I think this is the straw that breaks the camel’s back. Legal processes are slow and this means the entire mortgage market is frozen, so IMO the whole edifice is going to come crashing down. Obama had an opportunity to sort the problem out when he first came into office, now it’s too late. I’m expecting a crash and then a second great depression. Thanks to 30 years of politicians who didn’t have the balls to face reality (starting with Reagan and Thatcher) and accept the fact the West had to fundamentally reorganize it’s economic basis, my generation and those who are younger than me (I’m in my forties) are completely screwed. We are going to have to be another greatest generation…

  11. ABSGuy

    OK, so let’s take the worst case scenario — all MBS trusts are defective, and the sponsors have to repurchase the securities at par. To whom do the proceeds go? To the original purchasers? They were the ones who were originally defrauded. To the current MBS investors? They presumably bough the securities at a huge discount, resulting in a windfall for them. Moreover, the amount of required repurchases is in the hundreds of billions. Where will BAC, JPM, et. al. get the money for that? There is no easy solution I can see.

    1. Cedric Regula

      I think it adds up to around 10 trillion adding up F&F&FHA, CMBS, subprime, CDOs…but who’s counting.

      Nothing that Ben and Timmay can’t handle, and it would be spun as economic stimulus too.

  12. aet

    Calm yourselves, the real estate is not going to walk away.

    Two words: test case.
    Get some test cases decided, and then go from their: the mortgages in good standing – what, if anything, needs to happen to make them bulletproof?

    Ask some judges, maybe they can help..

  13. Jib

    Repeating BS question, how is this going to effect normal RE sales? If I go out and buy a house that the current mortgage is in MER’s, will I be able to get title insurance? If not, I can not get a mortgage.

    Think of the deviant cases where some one with standing wants to challenge a sale. This could be in a divorce or inheritance. Does MER’s effect any commercial RE? If so does that mean any minority shareholder can challenge any RE transaction on the the grounds that the current mortgage is invalid?

    I know I am probably over reacting but this seems like an enormous mess, the kind that could take a decade to unravel. Meanwhile, a whole generation that had most of their net worth locked up in RE equity gets to enter retirement with no way to unlock that money.

    Nay, it cant be that bad, the market is doing fine, no double dip, nothing to see here, just move on……

    1. ABSGuy

      @jib – I wish you were over-reacting, but I am afraid not. This has the makings of a mess of monumental proportions.

      Back in 2007 when the ABX (the subprime MBS index) had fallen a few points, the Street came out in force saying this was a gross over-reaction. Losses would never be more than a few percentage points. Buyers of protection (like myself) were pooh-poohed as hysterical nut-jobs. Within a few months the ABX had dropped by a third, on its way to 40, and a short time later the entire banking system was on life support.

      The lack of a perfected security interest in the mortgage loans on the part of the securitization trust(if true) is a very, very big deal. The requirements for the conveyance of mortgages is well-established, “black-letter” law. Anyone who says this is a “technical” problem is uniformed or lying.

      P.S., No, this problem does not affect commercial mortgage loans.

      1. readerOfTeaLeaves

        The requirements for the conveyance of mortgages is well-established, “black-letter” law. Anyone who says this is a “technical” problem is uniformed or lying.

        This might be a good spot for me to ‘second’ what Cedric Regula stated above: it is almost impossible for me to believe that either some party was accessing the MERS databases and overwriting things, and/or else inside parties were committing fraud.

        There is no way that I can fathom even a beginning database programmer failing to set up the system with clear restrictions on duplicate ownership, and also without ensuring — and testing, and double-testing — to be sure that ownership rights could not be ‘accidentally’ or inadvertently ‘captured or overwritten’ by any unauthorized party. I’d also emphatically ‘second’ what Cedric mentions about anyone using the system being required to leave a thorough, clear trail.

        It’s simply not credible to me that such a big system was simply a ‘technical problem’. That makes no sense whatsoever to me.

        Just to hammer home the point:
        In systems that I’ve been authorized to use, ever keystroke is potentially ‘findable’, every thing that I touch is coded with my ID, every minute that I’m on the system is known, every place in the system that I’ve touched has indicators.

        Something here strikes me as deeply, criminally sinister.

        1. readerOfTeaLeaves

          Should be:

          …it is almost impossible for me **not** to believe that either some party was accessing the MERS databases and overwriting things, and/or else inside parties were committing fraud…

          Even if there were an occasional issue here or there, a well-run, transparent system would find it on a daily or weekly review. It’s not plausible to me — apart from problems with duplication, or with someone digitally purloining data files — that a regular review didn’t catch problems.

          On that basis alone – i.e., where was the MERS maintenance group? where were daily reports? – this doesn’t make sense to me as I read about it.

          1. readerOfTeaLeaves

            Yo, Cedric!
            How weird is this?!
            (I’m up late, reading this and related blogs, and watching Dylan Ratigan because this is all weirder than my sci-fi novel… so I click back to this thread to see whether there are any comments that I should catch up on, and I see your link about ‘MERS has no employees’. So this, I gotta see, so I click your link and POOF!!!

            “Cannot locate server”.
            None of my browsers are getting a signal.

            Possibility #1: Washington’s blog is overloaded, and can’t handle the traffic.
            Possibility #2: DNS attack on the article that you linked to… and if that happens to be the case, then the plot really does thicken, eh?

            So now, I am **really** interested in reading that article.
            MERS has **no employees**?!!”
            Excuse me?!
            The MastersOfTheUniverse, the Genius Bankers are using a ‘service’ **that has no employees**?!

            Let’s just cross ‘due diligence’ out of the dictionary right here, right now, shall we…? (“Yes, Mr and Mrs Homebuyer, we always use a BigBlackBox called MERS, which has absolutely zero employees, to keep special care of your mortgage…”)

            MERS has *no* employees?!
            The article stating that MERS has no employees is suddenly — since you posted that link not all that long ago — gone ‘POOF!’

            Hmmmm… and Yves has been getting DNS attacks since she started highlighting the underlying fraud in foreclosures… coinkydink? Prolly not ;-))

            BTW: Dylan Ratigan at MSNBC did a good job of explaining today what may lie behind the forged foreclosure docs. Sounded as if he reads Yves posts.

            This would be rather unnerving if it weren’t so hilarious.
            If that link you left really has had a DNS attack, are these idiots really so bloody stupid that they need to leave server tracks saying “Guilty! Yes, we’re guilty! And we think if we send DNS attacks you’ll never catch us!”

            HILARIOUS ;-)))))))

          2. hermanas

            I just got through to Washington Blog (mers has no employees) and, wow. All those V.P.s better start lawyering up. It sounds like a criminal conspiracy from the start.

  14. James

    This is a sham. The AGs are coordinating the deals they are about to cut between banks, investors, and the federal and state governments. QE2 is just around the corner; I’m sure everyone can get everything wrapped up in a couple of months. Don’t think for a minute this will change a darn thing, except to retroactively make all of these illegal shenanigans legal. The banks might have to pay a fine, the funding for which will come from the Fed, but nothing of consequence will come of this except the strengthening of the banks’ hold on the economic, political, and legal institutions of this country.

    1. readerOfTeaLeaves

      If you actually believe that pensioners aren’t going to ask where their checks are, because the pension fund was tanked by Wall Street, MERS, and this mess, you see things very differently than I do.

      The entire system is being washed away, like a storm tide dashing a castle made of sand.

      We are in urgent need of new economic paradigms; we can’t go back to what brought us to this disaster. As far as I’m concerned, that’s the upside. The economic fantasies about Efficient Market Hypothesis and related nonsense that brought us here legitimated greed and selfishness.

      But what next?

      1. Cedric Regula

        They go after social security, maybe a nice VAT and some carbon taxes for good measure. It has to be paid for somehow.

        Also the FDIC needs money too, so a parking meter surcharge in definitly in order here.

        1. readerOfTeaLeaves

          Definitely in order.
          Also, a surcharge on popcorn — since we’re probably all starting to load up on it and begin popping.
          Oh, and an extra tax on butter for the popcorn.

          (Still laughing over possible DNS attacks on the article stating that MERS has no employees. Hysterical. Oh… My… God…!)

          1. hermanas

            Popcorn economy! MERS (no employees)but the substance and resemblence of a Bernie Madoff hedge fund.

  15. MinnItMan

    Equitable mortgages are better than no mortgages for the lenders, but they don’t have power of sale, which will affect 28 states. Also, they would essentially be dischargeable judgments in bankruptcy for owner(borrower)-occupied properties in states with large enough homestead exemptions.

    One problem for lenders however, is that equitable remedies usually aren’t available to those with “unclean hands.” They’re going to have to get them out of our pockets to check.

  16. Knute Rife

    This is what happens when you use your tax dodge as something other than a tax dodge. MERS was set up as a tax dodge, a clearinghouse where members could move paper among themselves without incurring filing fees and excise taxes with each transfer. Then the members decided to have MERS do the decidedly NON-clearinghouse function of actually carrying the water on foreclosures. So instead of paper turning up missing in satisfactions, sales, and refis, where everyone wants to get along and would be willing to accept substitute paper to plug the holes in the chain, we have it missing in foreclosures, where one side is decidedly NOT interested in going along. I feel like I’m watching the countdown on a building implosion.

  17. MinnItMan

    The AGs aren’t parties to these individual transactions and/or lawsuits. They can nail the lenders for deceptive trade practices, but not much else. They aren’t going to be able to make a deal that pre-empts private actions against the lenders. The AGs are largely posturing here.

  18. Simon

    Aren’t US taxpayers already on the hook for the vast majority of US mortgages?

    I think a problem as identified by Jib above is a high probability.

    The big banks aren’t going to be allowed to fail although plenty of people will be suffering intestinal convulsions over it.

    At any rate it seems likely another serious shake up is abut to occur. And Team Obama are likely to fall out of their tree.

      1. aet

        Thanks for the link.
        As the judge held, procedures cannot be ignored.
        Neither those which are contractually stipulated prior to bringing suit; nor those which are required by law to perfect security interests in collateral.

  19. Pascal Blacque

    So… what is to be done?

    Thinking constructively here … Imagine for a minute that you are Obama or “Turbo Timmy” or Lord Blankfein and ask yourself “What can we do to fix this thing as soon as possible without blowing ourselves up?”

    Do you believe the States will commit economic/political suicide (a near certainty if all hell breaks loose) rather than agree/negotiate to put their constitutional power on hold until a national fix is found?

    For example, couldn’t the federal government offer (and States agree) a blanket title insurance scheme to back all securitized notes (against some preferred shares in MERS-member banks/servicers) until the title chain is cleared up?

    Any thoughts? As they say in real estate: time is of the essence!

  20. Skippy

    Sorry Yves…but, I feel the need to put this into prospective, *this* being our mental state/positioning whilst an answer, out come is deliberated…of past discretions (fraud upon the citizens aka owners of America), legal opinion moving forward (to legitimize this fraud…due to its dominance upon the American citizens), by in some cases collusion with foreign entity’s, thrust upon foreign entity,s (public and private) or take on the responsibility[s we all have…legacy[s to future generations.

    With this humble offering, past post:

    Homeless Man Under Pressure.mov

    http://www.youtube.com/watch?v=QYXKaAzEJrk

    Whilst I watch this…there is two ads ( one inscreen and one off to right side of vid ) for a RE auction, in my city…3br 2bh 2cr with beautiful hard wood elevated deck giving lovely views of silvery green tree covered hills.

    Obviously he deserves his status…the Gods of marketing mock him.

    Skippy…thus we live with guns pointed to our heads…look…at your potential failure…submit, submit, submit, submit, submit ad infinity or be cast aside…

    Global Spartan Neoliberalism Market Judgment…in our kindness we offer two choices…get in the pit ( provide example too others ) or the cliffs ( stop draining my resources { cough…lifestyle multipliers }).

    PS. vid for DS, IOTBP, et al…this is what we are…

    ———-

    All of us…whiting or unwittingly own this debacle, it is my hope that all of us…put aside our differences and send a clear message, no more criminal fraud will be allowed, criminal acts which threaten this republic (especially from within) must not be allowed….at any cost.

    Skippy…Other wise upon birth we should issue a certificate as a state of derivative in a mortgage owned by the Bansksters…in lieu of brith certificates…its more…honest…legally…me thinks.

  21. Dirk

    The U.S. is turning more and more into a banana republic. Wasn’t giving the owners of the shanties in the slums around Lima clear title to their land supposed to be one of those things that would bring South America into the developed world. Now we find that the U.S. has millions of people without clear ownership title on their houses. SEriously in what major way s the U.S. not a banana republic. Chief exports are agracultural, massive income disparity, money = political power

  22. TC

    I vote “full bore job of obfuscation.” After all, Jamie Dimon today said this would be cleared up in a matter of weeks and would amount to nothing more than a “blip.” This is the man who claimed, “no one saw the sub-prime collapse coming” a few years back. Like a teenager: deny everything.

  23. VOR PADRINO


    rocket docket has apparently slowed to a crawl,

    Before the next market implosion what should an innocent bystander do to avoid the fan-feces? Sell everything and buy Australian long treasuries? Palladium? Krypton-ite? What is the consensus?

    Help
    !

    1. Cedric Regula

      Sell everything sounds right, it’s just that I can’t figure out what to do with the dollars.

      1. VOR PADRINO

        Thanks, Cedric. I bought a large bag of Mahatma Rice and a Taser. But what if my power goes off and I can’t charge my Taser?

        Merci auparavant
        !

  24. Westcoastliberal

    Anyone who has MERS on the deed of their property and is still making payments is a fool.
    This story is the biggest fraud in the history of mankind (2nd only to the previous fraud in 8/08 which we’re still paying for).
    These Banksters are going to get it both from the peon perspective with lawsuits galore over whom the money is actually owed to, if any, and from the investors (including pension and governmental funds) who bought into the supposed REMICS created out of the securitized mortgages.
    Imagine being a manager of one of these funds looking for higher than average return (including income) on the investment. Real estate backed sounds pretty good, considering that real estate always goes up (right), so you buy in. Only later you find this is a pig in a poke, it’s not the AAA investment you thought you bought. Thanks Banksters!
    So, you see, all these events are happening all around you and you’re still paying? Good luck with that!

  25. Scott W

    Is it possible that the same mortgage was used to back many MBS’s, so that no one knows who really holds the mortgage? This fraud is more than just a paperwork problem.

    1. Cedric Regula

      That’s still an unconfirmed rumor, but the confirmed rumor is the idiot banks bought the MBS they created. The reason is they needs something interest bearing on the balance sheet, so, you know, they can be banks!

  26. TC

    “The Wheels Are Coming Off in MBS Land” speaks volumes. This is not your three-year-old child’s financial crisis!

  27. Duster Dave

    Vor:
    You should buy food! Have you seen the reports on crop failures worldwide. Commodities are skyrocketing. When the economy does collapse, what is the only thing that really matters? Feeding yourself and your family, these house mortgage issues will be forgotten after the first night without food.
    US farming is suffering from lack of capital, and wet cool weather, no surpluses really exist. This is the real story of collapse coming.

  28. parnell

    As a reader without experience in real estate law or securitization I find that many bloggers I respect like Yves, Barry Ritholtz and Felix Salmon are lining up on one side of the issue while another that I respect equally, Calculated Risk, seems to be referring to the above named bloggers as being the source of his embarrassment at the coverage as he noted in a comment:

    “And anyone who read Tanta’s work would know she’d be ripping both the servicers and the Yellow Journalism. Both!
    I’m embarrassed by the reporting on this issue.”

    What’s a lay person to conclude?

    1. Yves Smith Post author

      With all due respect to CR, he is not a lawyer and Tanta did not deal with the trust and securitization issues. I’ve spent months on this and have checked many operational details and the legal theories with people who are life long participants in the securitization business, including a former general counsel of a public company. They have (reluctantly) come around to buy our thesis re the severity of the legal issues here (reluctantly due to the implications for the industry to which they have devoted their careers).

      This is outside of CR’s and Tanta’s area of expertise. And it isn’t just me and Barry and Felix, it’s ALSO Adam Levitin, one of the top experts on trust law in the US (and other trust experts) and top independent banking experts like Josh Rosner and Chris Whalen.

  29. Jim in SC

    I’m guessing that we have perhaps ten times the number lawyers in the United States that we had in 1970. Every law student has to study property law in their first year.

    Why didn’t somebody see these problems coming?

    1. Dan

      If people saw it coming and actively profited on it, then you have fraud

      This is the point

      And as a new lawyer, many lawyers are unintelligent hacks are too terrified to risk their cushy job

      Brave new world we live in….

  30. Hugh

    Massive systemic fraud. We knew it was there. We have known for 3 years. While it may not be surprising, its scope is still breathtaking. At the same time though the sheer scale of the frauds ensured that they would not be confined to certain areas but would permeate all things housing from end to end and from top to bottom.

    Factor in that these crooks thought they would never be called on any of this, that the government would always be there to paper over the legal deficiencies and bailout the financial ones (which, in fact, the government has done up to now), and that ultimately for them it was all IBG YBG anyway.

    Looking back on the last ten years (or 30 if you take a longer view), can any of us really be surprised anymore by how inept, incompetent, dopey, foolish, thuggish, and generally criminal our ruling elites have become?

  31. killben

    The simple fact of the matter is that if anyone is in default should be foreclosed on. Bad documentation cannot become a right to own a house when you are in default.

    But why should the Banks get the house when they do not have the title documents. Let the house be held in a escrow account of the Government. Banks can be given time to prove ownership of the house. If they cannot prove ownership then let the Bank eat the losses and the Government can auction the house and keep the money.

    Banks also need a lesson that they cannot get away with anything.

    Also this would be one way for the Government to recoup all the visible and invisible bailout funds invested in the banks, which deserves to pay for all its sins.

    But I am sure Government, Treasury and Fed will find a way to get the tax-payers to pay for everything and enable the banksters, who deserve a hiding for the havoc created, to go laughing all the way to the banks!!

    1. Dan

      “The simple fact of the matter is that if anyone is in default should be foreclosed on. Bad documentation cannot become a right to own a house when you are in default.”

      It’s not so black and white. Complicated facts mean complicated solutions. How do we know the homeowner is in default? If the original loan was procured by fraud, then one could argue while he should lose the home, he should get all the payments back (maybe less reasonable rental value?)

      This is why this is such a clusterfuck. The appraisals were fraudulent. Crap everything was fraudulent.

      Stop saying there are simple solutions. There are no easy solutions. Just madness.

      Bankers should be held to the highest and strictest standards and subject to the most stringent criminal penalties. However, it’s the opposite. They are above the law. Even worse, the top dogs are so sociopathic they truly believe they create jobs and have done nothing wrong.

      We need structural change. THAT is anything but simple.

    2. diddywadiddy

      “The simple fact of the matter is that if anyone is in default should be foreclosed on. Bad documentation cannot become a right to own a house when you are in default.”

      False. The simple fact is banks’ bad practices crashed the housing and job markets. There would be no foreclosures if market values had not crashed, people would simply sell the property.

      Only the banks are responsible for the housing and job market crash.

  32. skippy

    Pulled off CNBC NetNet comments see:

    izziets | Oct 9, 2010 03:22 PM ET

    Real life illustration of securitization (this case is being appealed to Supreme Judicial Court of Massachusettes:

    Rose Mortgage Inc.- Originator sells to
    Option One Mortgage corp-. who then sells to
    Lehman Brothers Holdings Inc.- who sells to
    Structured Asset Securities Corp.- who sells to
    Structured Asset Securities Corp. Mortgage Pass Through Certificates SASC 2006-Z Trust who issues MBS certificates sold to investors.

    US Bank National Association is the trustee of SASC 2006-Z Trust,

    Option One Mortgage Corporation is the Servicer

    Questions:
    Who is the proper party to foreclose and receive the proceeds? Who owns the underlying Note? Who can sign off on a modification?

    Isn’t it great that six different financial corporations can make money on one loan? What a system!

    P.S. The default rate for SASC 2006-Z was 35.7% as of 3/25/09 and 41.73% as of 6/29/09. (Can you say credit default swap heaven?)

    Terms of initial loan: $103,500 2/28 Libor Indexed, initial rate 9.5%, margin of 6.99%
    (Can you say designed to fail?)

    Skippy…remember only the really smart folks cough…banksters can understand this stuff, we must lisen to them, their here to help!

    1. Skippy

      I never thought I would see the day…proof…that money does grow on trees.

      All ye need is some one (proof they exist or can pay back…unnecessary) to apply for a Mortgage or Loan and BINGO PAY DAY!!!

      PAY DAY…hay I just had an epiphany who wants to help start a business….collateralising and scrutinizing PAY DAY LOANS… WE have the technology…cough obfuscation device….first in best dressed / kid on the block…you know. By the time anyone gets wise…were long gone, deniability up the wazoooooo….layers upon layers of low payed suckers to throw under the bus.

      Skippy…ringing the Prez, Timmah, Beaner, Alxrude et al right now, say yes say yes say yes!!!!

  33. steveo

    And so people get rewarded for reckless buying?
    And the taxpayers, earners and savers get f again?

    How can this play out…..

    By big gov, and big business inticing people to “invest” again while the responsible ones get s’d

    1. hermanas

      Why should taxpayers be brought into this? It’s a bank problem, the Fed is their deal, why can’t the Fed be responsible?

  34. Bob Scarino

    Re: equitable mortgages . . . there is a long-standing legal principle that requires a party looking for equitable relief not have “unclean hands”. . . hard to see how a bank that engaged in fraud would qualify.

  35. butscho

    This should get very interesting for the RMBS orginators, they should be liable, if the mortgage wasnt correctly transfered to the mortgage trust.

    Perhaps there is some value in Subprime RMBS, if a major bank still standing has orginated the RMBS, but not transfered the mortgages correctly.

    Perhaps investors can claw back the orginal amount from the bank and swapping distressed mortgage for cash.

  36. b

    This issue does not apply to just those in foreclosure. Wouldn’t all mortgage borrowers be well within their rights to demand declaratory relief from the courts to determine who, in fact, is the owner/holder of the note? Are there damages stemming from these missing or unsigned notes that an enterprising attorney can drum up on behalf of borrowers who are current on their payments? This site that Zero Hedge pointed to yesterday called “Where’s the Note” seems to be a step in that direction: http://action.seiu.org/page/speakout/wheresthenote?js=true

  37. dianneks

    Ladies and gents,
    I’m a new reader to this blog. Found my way over here via an article on The Hill after reading an article on the Daily Caller this morning regarding this whole mortgage mess.

    After reading some of the comments here and reading the articles mentioned above, am I, (niether a lender nor a borrower) looking at such an explosive situation that the whole economy could crash over this? I don’t see how banks can survive it. Am I overreacting?

    1. chad

      My gut tells me this issue won’t cause a crash or crisis. At the end of the day, it’s a legal issue and not a financial one. It will result in a lot of lawsuits but I don’t think directly affect the economy.

      However, I could see how this issue could lead to some “black swan” type of event that comes out of left field. Some weird implication no one thought of that causes havoc on a wider scale. Sort of like how Lehman’s failure caused the corporate paper market to literally stop.

      disclaimer, i’m not an economist nor employed in the financial industry so this is just my two cents.

      1. dianneks

        Thanks, Chad and Vooch. The markets don’t seem to be reacting too negatively;comments on CNBC almost brushing the whole thing off. I have a regulatory background (not in banking field) and this looks horrific to me. As much as I am a conservative and anti-big government, there has to be some reasonable (key word) oversight of these institutions. As far as I’m concerned, whoever hired Walmart greeters et al to perform these functions should be in jail.

  38. Vooch

    Big Banks can gone under – the real economy will be fine.

    Big Banks do very little in the real economy.

  39. Truthie Teller

    Can any realist imagine any US government allowing such havoc? Some sort of legislative fix is inevitable, especially given the reality that independent of the mechanics, parties were all agreed as to the basic intent: buyers assume debt, investors buy various slices thereof. This audience is simply indulging its wet-dream fantasies!

    1. diddywadiddy

      It does seem the parties were agreed. However the banks caused the crisis by crashing the markets for houses and jobs. They were bailed out.

      So when the ‘party’ ended, the banks, who caused it all, by any reasonable interpretation, were made whole. They shared the market risk with the house buyers and apparently violated the law repeatedly and willfully, yet have suffered none of the pain.

      So the legislative ‘fix’ must be to spread the pain proportionate to guilt, and write down the notes to market value, or to the proportionate loss in market value when the home buyer still has equity. This would force a mark to market and hurt the banks, but would be a huge, equitable and no-taxpayer-cost stimulus to the economy.

    2. VOR PADRINO


      legislative fix is inevitable, especially given the reality

      That’s it! You are the first to think of it. A legislative bill that will legalize fraud. But should we also legalize extortion? Naah! When extortion becomes legal for everyone then I will not be the only one in town who perpetrates it. Having lost my pricing monopoly, profit margins will drop for both me and all my competitors. The legislation will have run me out of business. We will all end up on welfare. With everyone on welfare but nobody paying taxes to draw down liquidity enough to prevent inflation, I will not be able to buy food and whiskey with my fixed income. Legislative bills won’t work. Instead the fraudsters, banksters, and pranksters will have to do time. But with a major subset of economic parasites out of business the added efficiency will cause our economy to take off like a Boeing 797 with both flapperons down, and all 4 after-burners a-blazing.

      Besides, Congress tried that fix already. With each Curtango Hole Patch come 20 new holes in the system. This time we need to fix the Adam-Smith-Economic-System with a rebuild from the ground up but include no back-door to the system, no built in fraud mechanism. This time we need a clean installation.

      But it was a good idea. Additionally, you were the first to think of it.

      Congratulations
      !

  40. David Bernier

    Congratulations to Yves Smith and contributors for
    in-depth coverage.

    I’m not clear on State powers vs. Federal powers.
    There is a notion in US law of a “Parens Patriae Doctrine”.

    In the GMAC lawsuit brought by the State of Ohio represented
    by the Ohio Attorney General, the doctrine of parens patriae is invoked.

    As I recall, Spitzer sought to enforce New York State
    fair-lending and following
    Spitzer New York State Attorney General Andrew Cuomo
    pursued the case and it came to be called:

    <>
    It ended up in the US Supreme Court and
    was decided June 29, 2009.

    Is there any chance of assertions of pre-emption with
    some arguable merit, should the case against GMAC end up
    in federal court?

    thanks,

    David Bernier

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