High Noon: Banks vs. The Law – Part 8

It’s happening fast and furious now.  It’s starting to feel like late summer 2008 IMHO.  All 50 state Attorneys General are now involved in a joint investigation.  JP Morgan Chase drops it’s use of MERS (see Part 4). And Citi circulates a research note from a Professor that suggests the problems are much deeper than the banks have admitted to.  Again we go to Yves Smith of Naked Capitalism to report the latest:

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.

High Noon: Banks vs. The Law (Mortgage Foreclosures) – Part 7

I know the story is getting old. This is my 7th post on the subject, but it is snowballing and casting a huge shadow on the economy.  The potential exists to freeze mortgage/housing markets for a few years, run up legal costs into the hundreds of millions, if not billions of dollars, and even, potentially to topple some major banks.  Again I turn to Yves Smith at Naked Capitalism to tell the tale:

Astonishingly, despite mounting evidence that the lapses in industry conduct were egregious and widespread (the failure to adhere to their own contracts; the widespread use of fabricated documents), the industry is trying to keep the focus very narrow and pretend the only thing at issue is the, um, improper affidavits, and surely that will be fixed shortly, really there is nothing wrong with the underlying process. The abject failure to convey notes says otherwise, as does more and more evidence of people losing their homes due to servicing errors or other abuses.

Before readers start arguing that these problems are small and therefore inconsequential, consider Barry Rithotz’s remarks:

There are multiple failsafes and checkpoints along the way to insure that this system has zero errors. Indeed, one can argue that the entire system of property rights and contract law has been established over the past two centuries to ensure that this process is error free. There are multiple checks, fail-safes, rechecks, verifications, affirmations, reviews, and attestations that make sure the process does not fail.

It is a legal impossibility for someone without a mortgage to be foreclosed upon. It is a legal impossibility for the wrong house to be foreclosed upon, It is a legal impossibility for the wrong bank to sue for foreclosure.

And yet, all of those things have occurred. The only way these errors could have occurred is if several people involved in the process committed criminal fraud. This is not a case of “Well, something slipped through the cracks.” In order for the process to fail, many people along the chain must commit fraud.

That it is being done for expediency and to save a few dollars on the process is why the full criminal prosecution must occur..

In another widely-circulated sighting, Georgetown professor
Adam Levitin provided a prognosis that some sites touted as a surprisingly dour forecast. I was actually found his remarks to be pretty moderate; I’ve been told by litigants who have sought his input that his private views are more pointed (although it is possible they cherry picked his views). From the Citigroup report (hat tip Karl Denninger):

Levitin articulated three possible outcomes to the aforementioned issues and assigned an equal likelihood to each. In his best case scenario, these issues are deemed merely technical in nature and are successfully resolved but it takes at least year to do so and all foreclosures are delayed by at least a year. Levitin disputed the claim by banks that these issues can be resolved in a month or so and attributed the banks’ claims to “legal posturing.” In the medium case scenario, litigation ensues and it takes years to sort out these matters. In the worst case scenario, the aforementioned issues become a “systemic problem” which causes the mortgage market to grind to a halt as title insurers refuse to insure mortgages involving existing homes

I see the odds that the problems are “merely technical” as zero. Levitin hedged his bets on how widespread the problems are with the conveyance of the notes. The reports I am getting are providing more and more confirmation for the notion that the notes were seldom, if ever, conveyed correctly from 2005 onward. And if that is the case, the problems are not technical but fundamental.

It would be better if I were wrong, but brace yourself for a rocky ride.

A rocky ride indeed.  There is more at stake here than just the money and homes of the foreclosed.  Also at stake is the core legal system of contracts and real estate property rights.  This system was evolved over hundreds of years.  It has held up well.  Until multiple players in the banking industry decided they need not play according to the law and could write their own rules for their own profit.

Check out Part 1Part 2Part 3Part 4, Part 5 and Part 6 of my posts on this topic.

 

High Noon: Banks vs. The Law (Mortgage Foreclosures) – Part 3

Ok, continuing the series on the mortgage foreclosure crisis here. For background on the legal side of the problem see Part 1 and for a humorous look by Jon Stewart at the crisis see Part 2.

The banks are claiming that the problems are only paperwork glitches, that all the people being foreclosed on are in default and owe serious money, and that foreclosures will resume soon.  Kind of a “nothing to see here, move along” response.  This pitch is getting echoed by politicians, the Wall Street Journal (I don’t link to pay sites), and, of course, the banks.  The White House seems to be falling into line with their bosses, the banks, too.  From the New York Times (free registration may be required):

The industry has argued in response that problems should be addressed without halting all foreclosures, because a moratorium would damage the economy. “It must be recognized that the mortgage market, investors and the health of the economy are all interrelated,” Tim Ryan, president of the Securities Industry and Financial Markets Association, said Monday.

The White House shares those concerns, and it has tried to defuse the issue by arguing that problems can be addressed without imposing a moratorium.

“There are, in fact, valid foreclosures that probably should go forward,” David Axelrod, a senior White House adviser, said Sunday on CBS.

Administration officials argue in part that the problems that have emerged in recent weeks do not change the fact that lenders are seeking to foreclose on people who borrowed and then failed to repay. Most of the identified problems are best described as technicalities, not miscarriages of justice.

But we also know it’s patently false.  There are clear cases of erroneous foreclosures including, but not limited to these reported in the same Times article:

Advocates for homeowners, however, say that the pattern of sloppiness allows and encourages more serious abuses. They point to a growing number of documented cases in which lenders mistakenly seized homes.

Bank of America apologized last month for foreclosing on a home in Fort Lauderdale, Fla. The homeowner didn’t even have a mortgage. The bank had failed to notice that the previous owner had repaid the mortgage loan.

Last year the company’s contractors entered the home of a Pittsburgh woman, changed the locks, cut off the utilities and seized her pet parrot. The bank later acknowledged that the woman had not missed any mortgage payments.

Other companies including Citigroup and JPMorgan Chase also have apologized for mistaken attempts to seize homes they didn’t own.

Dozens of people have sued lenders charging that their homes were foreclosed even after the lender agreed to a loan modification or repayment plan.

I just don’t accept that foreclosing and seizing (really stealing) a house that DID  NOT HAVE A MORTGAGE is more than a “paperwork glitch”.  There’s much more to this crisis.