naked capitalism

The market-moving stories, namely the US debt ceiling drama and the rolling Greek/Eurozone mess, are crowding out anything other than tragedies (the Norway bombing, Chinese train wrecks) and good old fashioned high profile prurient interest (DSK and the Murdochs).

Let’s briefly cover an important development in the US mortgage saga. I’m told that the Department of Justice is putting the thumbscrews on state attorneys general to sign a mortgage settlement deal this week (how exactly the DoJ can pressure state officials is beyond me, since the Feds typically ignore state investigations until they look like they are about to be end run, but hopefully readers can enlighten me). New York and Delaware, as we already indicated, are out via having launched their own investigations, as is Nevada (ground zero of the mortgage mess) and likely California. We’ve been told Arizona was out a while ago, but haven’t gotten confirmation that that is still true.

We are also told the banks are pressing (as we predicted) for a very broad release, and the announcement today from Martha Coakley, the Massachusetts state AG, strongly suggests she is another dissenter. Per Bloomberg:

The banks in settlement talks with state and federal officials are seeking broad releases to protect them from legal claims. Massachusetts Attorney General Martha Coakley said yesterday she won’t support an agreement that includes releases for securitization of mortgages and conduct related to a database of mortgages known as MERS.

“Massachusetts will not sign on to any global agreement with the banks if it includes a comprehensive liability release regarding securitization and the MERS conduct,” Coakley wrote to the Norfolk County register of deeds in Dedham, Massachusetts. “These investigations must continue.” The registry keeps real estate records.

“Conduct related to MERS,” from what I can tell (and I did a fair bit of checking) does not mean the banks are on the hook for MERS in a direct manner. MERS is not a shell company, even though its corporate governance was particularly unorthodox, to put it politely. A past efforts to pierce its corporate veil failed and corporate veil-piercing has not succeeded in the past save for closely-held companies. It would be an uphill battle with questionable returns, since running a private mortgage registry per se is not illegal. Even though there is a potential elephant in the room, whether local recording fees not paid thanks to the use of MERS can somehow be clawed back, that liability might not sit with the undercapitlized MERS. It most likely rests with the poor chump investors rather than the banks.

What Coakley likely means is bank liability for foreclosures that relied on MERS as part of chain of title. When creates chain of title problems, that means problems for the servicers. But that liability does not result from MERS. Rather, it is liability they created all on their own by having relied on a defective registration/transfer.

Massachusetts has become an important front of the mortgage crisis both by virtue of having handed down an important decision, Ibanez, which was a major blow to the securitization industry’s argument that the pooling and servicing agreement (the contract that governed the securitization) was sufficient to effect transfer of the mortgages to the trust. The Massachusetts Supreme Judicial Court is very well regarded, so that decision carried more weight than a normal state supreme court decision would. \

In addition, Massachusetts is also a state where one of the registers of deeds, John O’Brien, in South Essex County, has ascertained that both that there was considerable evidence of robosigning right in his records (which more recently reports show is continuing, despite industry lies claims to the contrary). O’Brien has also estimated the recording fees lost due to the MERS system in his county alone are $22 million and he’d very much like to get it back. Dave Dayen at FireDogLake wrote:

It’s telling that Coakley had to respond to a register of deeds, the unassuming, ministerial recorders of real estate transactions who are starting to wield considerable weight as a settlement is discussed….

They have the evidence. A simple crowd-sourced movement of registers can document years and years of fraud. MERS is central to that, because that’s the electronic registry which basically superseded the public land recording system in this country during the bubble years. This is entirely tied up with securitization failures, and liability for this mess, which is at the heart of the foreclosure fraud issue, should never be signed away. And now, Coakley is saying she won’t. I hope more AGs join her.

Amen to that.