MERS: Exposing the Straw Man

In the wake of the Kansas Supreme Court decision in Landmark, MERS role in the mortgage crisis is getting some serious press from the likes of Gretchen Mortenson of the NY Times (who has been reporting consistently on the crisis) and Matt Taibbi (see previous post).

Matt Taibbi on Mortgage Fraud

Remember Matt Taibbi? He wrote the piece on Goldman Sachs. He is one of the true investigative journalists left and he is writing a piece on the vast mortgage fraud. Here is his teaser from his blog (also briefly discussing the landmark Kansas Supreme Court case that came out last week):

Waking up to discover the mortgage market was a giant criminal enterprise
A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.

via Landmark Decision: Massive Relief for Homeowners and Trouble for the Banks.

This is a potentially gigantic story. It seems that a court has ruled that about half of the mortgage market has been run as a criminal enterprise for years, which would invalidate any potential forelosure proceedings for about, oh, 60 million mortgages. The court ruled that the electronic transfer system used by the private company MERS — a clearing system for mortgages, similar to a depository, that is used for about half the mortgage market — is fundamentally unreliable, and any mortgage sold and/or transferred through MERS can’t be foreclosed upon, at least not in Kansas.

Coincidentally I’d been working on something related to this all day yesterday. All over the country, lawyers are contesting foreclosures because of similar chain-of-custody issues. I have some material about this coming out in my next Rolling Stone story, so I can’t get into this too much, but suffice to say the lenders and the banks were extremely sloppy about their paperwork (at best — there is a fraud angle as well) and jammed up the system with missing and/or mismarked mortgage notes. Since a sale isn’t legal unless there’s full transfer of the physical note, a lot of the sales of mortgage-backed securities were not entirely legal, since the actual notes were often not transferred.

Nothing like waking up in the morning and finding out a whole sector of the economy is completely screwed. Are these good times or what?

Although this particular case pertains to MERS, non-MERS mortgages were often even worse. Anyway I have more on this coming next week.

Thank you Judge Haines (Holding Wells Fargo Accountable)

An Open Letter to the Honorable Randolph Haines of the United States Bankruptcy Court, District of Arizona:

I am an attorney representing homeowners in their battles to save their homes from foreclosure and the grips of the “pretender lenders.” I wanted to thank you for having the chutzpah to hold Wells Fargo accountable regarding its modification practices in your courtroom today.

I attended the hearing today.  I was impressed with your questions.  I was less impressed with Mr. Ohayon’s answers.  

In my experience, the customer service problems go beyond negligence and approach the darker reaches of criminal.  Numerous modification packages are sent and lost, hour long phone calls that are suddenly “dropped” or “lost” when an employee is held to task.  Every time you call you get a different employee who will not give you a simple email address or direct extension or a name.  This is compounded by lost notes, lost documents, cryptic references to “investors” whose identities and terms are “confidential.” (To whom?  Isn’t it my client’s note?)  There are endless repeats and rehashes of information already provided followed by false promises of modifications coupled with sneaky foreclosure sales.

The worst of this is that the servicers do not have a pecuniary interest in the transaction and are not the parties entitled to foreclose (or modify) at all.  I am sure that you are familiar with the mad rush to securitization of 2003-2007, the advent of “private” label issuances (read:  Wall Street replaced the GSEs as the issuers of these MBS and completely disregarded any sound underwriting practices, counting on false appraisals and strong-armed AAA ratings to carry the day), and the ensuing mortgage meltdown.  You probably see the shoddy paperwork that the servicers pass off as a competent proof of claim, with notes fraudulently endorsed, backdated, and notarized in several different states, with several different timelines, and recorded as an afterthought, after hiding on the MERS system for decades.   See Katherine Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Texas L. Rev. 121 (2008).


I’ve been trying to circle around what really bothered me about Wells’ testimony today and it was the complete passivity when recounting the problem.  Wells (and the other servicers) act as though this crisis just happened for unknown reasons that they had nothing to do with.  They omit the salient fact that they participated and profited obscenely in the process, to the detriment of investors (pension funds, mutual funds, especially the smaller ones without the muscle to receive any of the bailout manna) and homeowners alike.

Mr. Ohayon circled around the issue, discussing the PSAs that may restrict the ability to modify under HAMP, however, he failed to provide any accurate statistics for how many of the private investor (aka the Lehman, Bear Stearns and the Wall Street Masters of the Universe underwritten securitizations) get modified (by “modified,” I mean substantively modified, not these ridiculous forbearances that Wells erroneously presents as a logical solution in this community of devastated home prices) at all.  He kept glomming the GSE Fannie and Freddie modifications with the others and failed to provide a true number.  Also, we know that Fannie and Freddie are buying up these “toxic asset” pools with taxpayer money.  What effect does that have?

In addition, Mr. Ohayon’s assertions that the servicers have no incentive to foreclose, calling that an “urban myth” is laughable.  If that is true, I would like to hear his explanation of the counter-intuitive decisions that Wells Fargo and its ilk make every day.  They will foreclose in a heartbeat rather than work with the actual homeowner.  A reasonable person would ask, “why would they want to realize the loss of the current market value of the house rather than have a homeowner in a performing loan?”  Why indeed? The answer lies in their side deals with the securitization of the loan, and the side deals and incentives that were created therewith, in the form of “credit enhancements” of the structured finance products, including cross-collateralization, credit default swaps, bond insurance, and so forth.  None of these deals were disclosed or approved by the borrower, yet his loan is substantively affected.  Would the homeowner or the investor have approved of these terms?  We think not, especially when the investor discovered that he was not buying $1,000,000 in collateral but merely funding a loan for property with a stated value of $500,000, and an actual value of $250,000, with the securitization middlemen pocketing the neat profit. 

Mr. Ohayon kept going back to his home base about “customer service” and the careful balance that the servicer must create in servicing the so-called “customer,” the home owner, and the investor.  What kind of balance is it when the servicer owes fiduciary duties to the investors, and yet fails to acknowledge any duty to the borrowers (as proven by countless whiny Federal Rule 12(b)(6) motions to dismiss by Wells and the gang).  Further, Wells dutifully asserts that it is bound by these PSAs but what effect does the federal legislation have on these contracts?  Should there be preemption of these anti-modification provisions?  Moreover, as the judge inquired, have they even tried to get an investor vote on a single mod?  And what happens when the 5% threshold is reached on the PSAs with that requirement (not that they’re in any danger of reaching the 5%)

And what of the homeowner, whose rights are trampled as they’re ushered out into the street with their children, aging parents, health problems, and chronic unemployment?  Talk about a “moral hazard.”  And such is the hypocrisy…

Thank you for taking action and doing something to give the voiceless a voice today.  It’s a great start to a conversation that needs to happen in this society.    A lot of questions were asked and a lot more questions have arisen.   

Respectfully yours,

Beth K. Findsen, Esq.