By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen
The top Republican on the House Financial Services Committee has tucked a provision into his mortgage finance reform bill that would create a privately held “National Mortgage Data Repository.” The repository would basically look like MERS, the bank-owned electronic database tracking mortgage transfers. The difference is that, while MERS’ activities have drawn legal challenges across the country, the National Mortgage Data Repository would have the force of statute to carry out the exact same behavior. According to the bill text, any document arising from this repository would be seen as presumptively legal, pre-empting state and federal laws on demonstrating the right to foreclose.
Jeb Hensarling, the chair of the House Financial Services Committee, introduced the bill last Thursday. Hensarling has already gotten into trouble this year for taking a ski vacation/fundraiser with Wall Street lobbyists, including an official from the American Securitization Forum, just six weeks after getting the Financial Services Committee gavel. Financial interests donated over $1 million to Hensarling in the last election cycle. It’s not a stretch to suggest that legislation offered by Hensarling at least has the stamp of approval from Wall Street, if it’s not directly written by their lobbyists.
The bill is called the Protecting American Taxpayers and Homeowners (PATH) Act, and it’s the House Republican response to a series of bills and initiatives to resolve Fannie Mae and Freddie Mac, and set a course for the future of mortgage finance. Most of the bill deals with that: in Hensarling’s vision, Fannie and Freddie are totally dismantled within five years, and private actors take up the slack with virtually no government guarantee. While in the past I’ve trashed the idea of just reconstituting Fannie and Freddie under a different name, in reality, expecting private actors to recreate a secondary mortgage market without any guarantee (or even with one, in my view) is wishful thinking.
But that’s not what’s interesting about Hensarling’s bill, which sprouts from the same “GSEs caused the housing crisis” rhetoric that conservatives have parroted for years. No, it’s this revelation of the banks’ true desire to wrap up the documentation failures of the bubble years that should raise alarms.
Title III of the PATH Act directs the Federal Housing Finance Agency to provide a charter for something called the National Mortgage Market Utility (NMMU). Basically, whatever the FHFA Director approves as the NMMU is acceptable – through a cooperative, partnership, whatever. The FHFA then regulates the NMMU. Basically this utility would create standard practices for origination, servicing, pooling and securitization of mortgages, and operate a common securitization platform, something we’ve seen in other drafts of mortgage finance reform bills. Allegedly, community banks would not be discriminated from participating in the management of the utility, but if this has to take on a spate of duties formerly performed by Fannie and Freddie, there’s little question that big financial institutions would be favored.
There’s a lot to this National Mortgage Market Utility (for one, its creation, under the bill, would allow for the exemption of mortgage backed securities from SEC oversight under the Securities Act of 1933), but let’s focus on how it’s empowered to bulldoze state and federal property rights laws. According to Section 331 of the bill, the utility would “organize and operate” the National Mortgage Data Repository. The repository would be a standardized catalog into which any qualified depositor (qualified by the utility, it appears) could stash all their mortgage-related documents – including notes, mortgages, and any related information. The repository would set the standards for the required information in the documents, as well as standards for recording a “creation, assignment, or transfer of interest.” You’ll notice the lack of any regulatory oversight of these procedures. Basically, this private entity, the National Mortgage Market Utility, which could be owned by banks, sets the rules for a brand new private mortgage transfer and document database, not dissimilar to MERS. Theoretically, the data in the repository would be publicly available, with privacy safeguards.
Now here’s the kicker. The repository’s defined purpose is to “address problems that can arise when paper notes cannot be produced, due to loss or destruction as a result of natural disaster or other causes; and to provide a uniform procedure for demonstrating the right to act with regard to such notes or other registered data for all actions in any State or Federal proceeding, judicial or nonjudicial, involving such notes or other data.” Emphasis mine.
To that end, here is Section 332 in its entirety:
Notwithstanding any provision of State or Federal law to the contrary, by proper demonstration of registration with the Repository, any holder of an interest in any mortgage-related note shall satisfy any requirement for demonstration of a right to act regarding such note or other registered data that exists in State or Federal law, including any obligation to produce or possess an original note. The Director (of FHFA) shall provide for the establishment of procedures for proper demonstration of registration of any mortgage-related document and of an interest by the holder of an interest in any such document with the repository. Once registered with the Repository, such registration shall be a legal right enforceable in any judicial or nonjudicial process.
What you have here is the total pre-emption of every state or federal law regarding the right to foreclose and ownership of the note. All of that gets shoved aside in favor of the doctrine that every document in the National Mortgage Data Repository is presumptively legal. Period. This would wipe away in an instant all the challenges to the failures in securitization. Under this new process, all property and due process rights that currently hold would be subservient to the ability for a note holder to get its documents blessed by the repository. Judges would have to follow the statute, and regardless of robo-signing, backdating, forgery, lost notes that magically reappear, or the failure to properly convey notes to the trusts, they would have to treat any registrant from the repository as having an enforceable right to foreclose.
It’s certainly an elegant solution, I’ll give it that. Take all the questions arising from whether MERS has the legal right to foreclose, and all the myriad problems with mortgage documentation, and just will it away with a brand-new private database that pre-empts all those questions and concerns. All those losses MERS has suffered in state courts? Gone. All those problems servicers are having foreclosing in states like Nevada and California and elsewhere? Poof!
States have always controlled property law, and this Republican bill would wrest away that state control, putting it not in the hands of the federal government, but a private entity. The banks would be able to foreclose because a repository, in all likelihood owned by the banks, said they had that legal right. People thought the IRON Act would clean up the banks’ problems; this does all of that and much, much more. The provision is best described as Foreclosure Fraud-Away.
I normally don’t jump at every Republican bill that comes down the pike. The Hensarling-authored PATH Act isn’t going to become law, and indeed, Congress doesn’t appear to be in the business of making laws these days. However, this is important because it represents the opening negotiating position of House Republicans in the ongoing debate over what to do with the GSEs, which may actually turn into legislation someday. And given Hensarling’s close association with Wall Street, it almost certainly represents the banks’ desired solution on how to resolve foreclosure fraud for the future, by simply making it impossible to challenge fraudulent documents and enlist one’s personal private property and due process rights. That this was tucked inside a larger bill shows that financial interests want to keep the whole thing very quiet and hopefully get it through in whatever mortgage finance legislation ultimately emerges.
This is also a vindication of sorts, because for years we’ve heard from the banks and their allies that these are merely “back-office” screwups, nothing to worry about, and that they complied with all existing state and federal laws. Furthermore, they’ve claimed that these problems have ended, and that the documentation system is now clean as a whistle. Well, obviously that wasn’t true, since they continue to try to use their kept men and women in Congress to dig them out of the very real hole they created for themselves, using the time-honored tradition of de facto legal immunity. If the system was working there would be no need for pre-emption.
At least the Corker-Warner GSE bill only had the problem of likely not working. That’s nothing compared to Hensarling’s bid to eliminate private property rights in every state in the Union.