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...and here's our next problem in the real estate and mortgage industry. MERS. Read on for an outline of a presentation I recently concluded introducing real estate agents to the concept of yet another mortgage securities fraud scheme.
1. New Crisis Overviewa. Lenders have frozen foreclosures due to allegations of improper documentation and review of files b. Main problems i. Robo-signers ii. Missing documentation iii. Failure to properly review documents 2. An introduction to property transfers a. Gretchen Morgenson quote “…For centuries, when a property changed hands, the transaction was submitted to county clerks who recorded it and filed it away. These records ensured that the history of a property’s ownership was complete and that the priority of multiple liens placed on the property – a mortgage and home equity loan, for example- was accurate. During the mortgage lending spree, however, home loans constantly changed hands, Those that ended up packaged inside of mortgage pools, for instance, were often involved in a dizzying series of transactions. To avoid the costs and complexity of tracking all these exchanges, Fannie Mae, Freddie Mac, and the mortgage industry set up MERS to record loan assignments electronically. MERS did not own the mortgages it registered, but it was listed in public records as the nominee for the actual owner of the note or as the original mortgage holder. As long as real estate prices rose, this system ran smoothly. When that trajectory stopped, foreclosures brought against delinquent borrowers began flooding the nation’s courts. MERS filed many of them… As cases filed by MERS grew, lawyers representing troubled borrowers began questioning how an electronic registry with NO ownership claims had the right to evict people. ” 3. The underlying problem - MERS a. What is MERS? i. MERS is a shell company that created an electronic database for the trading of mortgages ii. MERS would claim to package millions of loans, with or without delivering the promissory notes, into loan pools or mortgage back security trusts, then flip the loans by selling bonds to investors b. Who created it? i. Fannie Mae’s CEO James Johnson ii. Countrywide’s CEO Anthony Mozilo 1. Who was later indicted on securities fraud charges in 2009 2. Mozilo acknowledged Countrywide was increasing risky loans and did not tell investors iii. Countrywide and Fannie Mae were the lead organizers/shareholders/”members” of MERS iv. It is a wholly owned subsidiary of big financial institutions (see printout) c. Why was it created? i. Servicers used it to trade mortgages without having to record the mortgage change, as MERS remain the mortgagor on paper ii. Package sub-prime loan and resell to third parties (i.e. international banks) iii. Quickly flips unqualified loans to 3rd party investors iv. Allowed banks to report exceptional profits and key players (who are on the board of MERS) to receive bonuses v. Now it makes sense why lenders wrote mortgages for sub-prime - they KNEW they would sell the loan ASAP d. How come no one knows about it? i. No lobbying or promotion ii. Stayed under the radar e. People have begun to question how a shell company call MERS could foreclose on homes when they had no ownership claim f. To this day, MERS has never originated a single loan nor loaned a dime to a single borrower 4. Traditional Filing System a. Traditionally filed by: i. Traditional note is assigned to the mortgagor and recorded with the county ii. If the note is sold to a third party, the actual promissory note must be delivered to the third party, and recorded with the county b. Structured mortgage securities typically constructed as Trusts 1. Trust hold mortgage note, which allows bundling of notes 2. Note is physically transferred to Trust c. Creation of a legal Residential Mortgage backed securities (RMBS) and Collateralized Debt Obligation (CDOs) i. The physical note the bank hold must be deposited into the Trust 1. Note holder entitled to receive payments and interest 2. Has the right to foreclose/take property in event of default 5. MERS Filing System a. Has completely ignored the structuring process i. Proper filing of the mortgage note every time the product changed hands did not happen under MERS ii. Instead, they issued “blank” mortgage assignments all along the channel of transfers, skipping the actual physical recording of the mortgage at the county registry of deeds b. MERS filing/record keeping i. MERS does not keep documents, it is a “paperless” system 1. Many of the so-called mortgage backed security trusts do not actually hold the promissory notes which evidence the debts that are supposed to be backing the bonds purchased by these investors ii. Causes improper construction of Trusts 1. Note is never reassigned to Trust 2. Requisite filing of mortgage lien with county never done 3. There is no documentation, as it is a “paperless” system 6. Why are banks using MERS? a. Saves on recording fees b. Allows lenders to package and resell sub-prime loans ASAP c. Keeps MERS as mortgage holder, even though they have sold off the notes d. Most importantly, allows MERS to receive an investment grade rating by assigning bankruptcies to a single purpose subsidiary of MERS – Merscorp (approx. 60 employees, mostly lawyers) e. Shell company i. No employees, but thousands of assistant secretaries and vice presidents ii. hires “foreclosure experts” such as Walmart workers, assembly line workers, hair stylists, etc to sign documents iii. You can purchase a MERS corporate seal for $25.00 online 1. Robo-signers 2. One secretary stated her signature had no legal meaning, etc. 3. An assembly worker stated he really didn’t know what a mortgage or assignment was… 7. Additional information a. 60% of all American mortgages held by MERS shell company i. MERS has saved banks over $1 billion by blank assignment b. See handout for banks who are shareholders of MERS c. **MERS does not process foreclosures – it outsources to foreclosure mills or back to the servicers, just as the assignment of mortgage was outsourced to them d. States currently looking into MERS i. Supreme Courts in Kansas, Arkansas, and Maine ruled MERS is not the mortgagee and has no legal standing to foreclose ii. SC (so far) says they can foreclose, even though MERS cannot produce the note e. Potentially sold same loans multiple times to 3rd party investors 8. Public review - Can MERS foreclose on a home when it cannot produce the note? a. Office of Federal Housing Enterprise – May 23, 2006 i. Highly critical report published 1. “an arrogant and unethical corporate culture where Fannie Mae employees manipulated accounting and earnings to trigger bonuses for senior executives from 1998 to 2004…Senior management manipulated accounting; reaped maximum, undeserved bonuses, and prevented the rest of the world from knowing…” b. 2001 – New York Supreme Court i. orders Suffolk County Clerk to accept MERS mortgages for recording as a purely ministerial duty, ii. BUT refuses to issue judgment declaring MERS “lawful in all respects.” iii. New York Court of Appeals agreed with the decision iv. MERS did not pursue issue – as they did not want to risk having a published opinion that MERS has no standing as a creditor c. South Carolina i. Dismissed a MERS action to foreclose for lack of standing even though a MERS officer claimed MERS was in possession of the promissory note ii. SC court was informed that MERS previously told Nebraska court of appeals that it never held promissory notes d. California adopted a rule of practice which requires all foreclosure trustees or other plaintiffs produce the original promissory note e. Kansas, Arkansas, and Maine have ruled MERS has no legal standing to foreclose 9. Ramifications a. Loans may become unsecured debt, similar to a credit card instead of a mortgage b. If ruled an equitable mortgage (typically done when there’s a technical defect) judges would have considerable leniency with different options, such as readjusting an ARM loan down to a traditional interest rate in the “interest of justice.” c. Title becomes cloudy, both on foreclosed homes and performing mortgages d. Who has the note – does it still exist – and how many times was it transferred/sold? i. Many lenders and pools who bought these mortgage securitizations don’t have the proper documentation to prove they even hold the mortgage e. Lawsuits i. If MERS cannot produce note, it raises the question as to whether these mortgages are really lost or might have been fraudulently used in multiple securitizations, according to Wall Street veterans ii. Investors will be seeking to recover their losses or receive the promissory notes from the National Banks who used MERS – (ex. Ordered a Ferrari, given a Hyundai) iii. Homeowners can take action demanding promissory note to be produced and file the with lien holder. 10. What should you & your clients do? a. Look on mortgage document and see if you are in the MERS system b. If so, call your mortgage company and tell them you would like verification in writing of: i. Any title assignments to third parties ii. Verifications your payments are going to the current holder of your note iii. A “blue-ink” copy of your original agreement 11. In conclusion a. It’s time to force all members of MERS to fix all the titles they have damaged, at their expense, and record true and accurate information i. But wait…what if the assignments never happened…that could get messy b. “At the root of the crisis we find the largest financial swindle in world history, where counterfeit mortgages were laundered by banks.” (Noted by a prominent economist)
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.