What's Behind the Foreclosure Crisis

By Numerian

"MERS acts as nominee in the county land records for the lender and servicer. Any loan registered on the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies." About theMortgage Electronic Registration System, MERS

The foreclosure scandal surrounding the US financial industry is being portrayed by the banks as a technical problem which requires that some documentation errors be fixed. The White House has rejected the calls of many in the Congress for a nationwide moratorium on foreclosures on the grounds that there are quite a lot of them that are legitimate and should be processed. Government officials say it is going to take just a little bit of time to sort out these from the flawed foreclosures.

Terms like “technicalities” and “document flaws” are meant to sound innocent and minor, when the truth is that the foreclosure problem is just one part of a much bigger crisis that is still out of sight for the media, and apparently being downplayed by the industry and its political apologists. This crisis at its core revolves around an attempt by banks, mortgage brokers and other financial institutions to privatize and usurp the government-run county record system that for over 200 years has guaranteed the property rights of American citizens. The long term question is whether this private usurpation, which was implemented without review or approval from any elected representatives of the people, should be allowed to stand. The short term question is whether use of this private records system has irrevocably corrupted the unbroken chain of title to property that existed in government records, and in so doing fatally undermined American confidence in private property rights (rights which are guaranteed to Americans under the Fifth Amendment to the Constitution). The following series of initiatives by the banking industry will explain what transpired, and it will be seen that these initiatives from the start were plagued by false legal assumptions, misrepresentations, shoddy record keeping, and loss or deliberate destruction of critical original real estate documents such as deeds, titles, and notes.

How a Private Record Keeping System for Real Estate Transactions Was Created

1) The creation of a mortgage backed bond securitization process in the 1990s led to the establishment of a financial industry clearing house for mortgage documents, called MERS. The industry assumed and asserted that MERS replaced the traditional, time-tested legal process for recording with county officials all property titles, mortgages and liens, and notes evidencing indebtedness. The intent of the banks which established MERS was to circumvent the government property record system and privatize it with a system they owned, and which they intended eventually to own all mortgages in the US. This helped the banks avoid billions of dollars in fees and taxes which traditionally had been paid to local governments each time a change was made to a property’s chain of title. Under this system, MERS has claimed that it is the owner of a mortgage in default (it is the mortgagee), but at the same time the member banks which own MERS and must go to court in a foreclosure have also claimed to be the mortgagee.

2) This dual, simultaneous claim to mortgagee rights by MERS and its bank members has caused endless confusion in courts dealing with foreclosures. Increasingly, courts are ruling that MERS has no legal standing in these mortgages and cannot be the mortgagee. MERS does not lend any homeowner any money, MERS has too few employees to even process foreclosures, and MERS deliberately allows member bank employees to download foreclosure documents, and use the corporate seal of MERS, as “vice presidents” of MERS when in court. This last point is a transparent ruse to deputize thousands of bankers around the US pretending to be MERS officers, when it is obvious they are not paid by MERS and know nothing of the company. On these and related grounds, state Supreme Courts in Arkansas, Kansas, and Maine have ruled that MERS cannot foreclose on and sell property because it has no legal standing as mortgagee. Courts in many other states have come to the same conclusion.

3) When banks have in turn shown up in court to enforce their rights as mortgagee, they often fail to produce the original note from the borrower, written record of any assignment of the note to other lenders, the original deed or beneficial trust to the property, and affidavits from the bank asserting that they are the proper holders of these documents. Consequently, foreclosures have been denied because the purported mortgagee cannot even prove they have legal standing to pursue a foreclosure.

4) While MERS seemed to do an adequate job of recording electronically on its books the transfer of ownership of a property or any creditor claim to that property, it did not follow through on the necessary recording of titles, notes, and related mortgage documents with the appropriate county officials. For one thing, this avoided paying hefty fees and taxes to these local governments for each transfer of a mortgage or related change to the chain of title for a property. Secondly, this allowed MERS to claim its records alone were sufficient to record property rights, even though its records were restricted to its members and kept hidden from the homeowners involved.

5) If a county records department does not have original documentation, then under state laws property title and mortgage claims against that property are not legally valid. This is especially so if it is not clear in the record who the mortgagee is, and also if the mortgagee is not the same party listed as the party of interest in a note evidencing indebtedness. This latter point has been an incontrovertible element of constitutional law in the US, and much earlier in England, from the 19th century on. What MERS has effectively claimed is the ability to overturn and undermine both the tradition and US Supreme Court rulings which have time and again made clear that property cannot change hands if it is not clearly stated who has ownership rights, who is buying the property, who has a mortgage on the property, and what the financial interest of all these parties is in the transaction.

6) Once MERS was in place, banks bundled thousands of mortgages together into a single security that offered investors different cash flows depending on how much risk they wanted. Investors could buy Aaa rated bonds backed by the highest rated mortgages, down to junk bonds backed by subprime mortgages. The rating agencies predicated their ratings on the assertion from the banks that a trust was being set up with complete legal standing to the collateral represented by the homes, and that the necessary emendations were being made to county records for these and any future changes, so that the title chain remained unbroken. Similarly, investors were assured that the trust was collateralized by the property, and that the banks had legal standing as mortgagee to enforce investor rights through foreclosure on defaulting properties (this despite the fact that the courts were being told MERS was the mortgagee).

7) We are now discovering that MERS offered no such protection legally, and that the financial industry was deliberately lax in transferring the proper original documents to county recording offices. In what seems now to be a majority of all mortgages that were securitized, which were over the past 15 years millions of mortgages totaling many trillions of dollars in value, the original documentation has been lost or deliberately destroyed. The chain of title has been broken and the banks may be unable to recreate it, since so many mortgage brokers, law firms and other players in the housing bubble have gone out of business.

8) These mortgaged backed securities were often guaranteed by the financial housing behemoths Fannie Mae and Freddie Mac, who collectively own or guarantee several trillion dollars worth of such paper. Both of these entities collapsed in 2008 and are now wards of the federal government. They have begun in the past year to put back to the banks billions of dollars of securities that are flawed by virtue of fraudulent statements regarding the borrower’s income or assets, or overstated appraisals. The possibility that trillions of dollars worth of additional securities may be corrupted by lack of complete legal rights to the collateral is only now beginning to be comprehended.

9) In 2004, Fannie Mae and Freddie Mac were forced to shut down their mortgage business for several years due to accounting irregularities on their own books. Wall Street took up the slack and began issuing securities based solely on the Aaa ratings from Moody’s or Standard & Poor’s, and based of course on the collateral behind the mortgages. These securities were much poorer quality than what would have been accepted by Fannie or Freddie, and they were sold around the world to pension plans, mutual funds, endowments, other banks, and governments. These securities – already seriously impaired by the collapse of the housing market – are now further suspect because of flaws in the collateral rights.

10) Once the housing bubble burst and defaults began accelerating, the financial industry was in a bind over how to establish its right to declare a default, evict a property owner, and sell the house when the banks did not have original documentation, which was also not properly recorded with county officials. To get around this problem, law firms cropped up promising to recreate the record trails and find the missing documents. Since the banks were not about to hire tens of thousands of people to do this work, they relied on these subcontractors instead. What courts have discovered is that the legal work being submitted since 2007 when defaults became a problem is corrupted by false signatures, dates which don’t match the purported events, fictitious notarizations, and altogether phony claims that a proper legal right to foreclose, evict, and sell the property exists.

11) To complicate this, the banks submitting these foreclosure claims have been themselves guilty of false assertions. The officers attesting to the accuracy of the documentation have been known to sign hundreds of foreclosure claims a day, which they themselves admit they have not personally verified for accuracy, as required by law.

12) Far too many judges in the US hastened this process along by approving hundreds of foreclosures a day without checking the documentation submitted. A simple review would have revealed inconsistencies and errors on a majority of these foreclosure cases.

13) The banks were motivated to process as many foreclosures as possible to “clean up their books” quickly, and because of this a cottage industry of private investors called “floppers” arose to take advantage of the firesale prices offered by the banks. Bank-foreclosed properties have typically sold at an average discount of 30% to other property sales in the residential market, so this represents instant profit to floppers who could resell properties in a matter of months, especially after the Obama administration removed restrictions on such resales that previously required much longer holding periods. Some evidence is emerging that these investors might have “motivated” bank officers or legal firms with kickbacks so that more and more foreclosures could take place. One thing is clear: in many banks and law firms involved with foreclosures, staff were paid bonuses for processing high volumes of foreclosures.

14) The foreclosure process took on a frenzy in recent years not unlike the frenzy that led up to the housing bubble. Homeowners were sent foreclosure notices by mail, and had difficulty reaching bank staff to work out accommodations on the mortgage terms, which were rarely granted. The legal requirement for a bank to meet face-to-face with the homeowner was usually ignored. Homeowners across the nation weren’t simply deprived of due process as required by the law, they were often deprived of any process other than being told to leave their home by a set date. Because of the flaws in the documentation, many homeowners could have challenged their eviction and loss of their home had they known of the problems with documentation, but they had no access to the documentation to discover this unless they were willing and interested in forcing the bank to provide this material. Multiple banks have foreclosed on the same home, since even the banks are confused about which of them has true legal rights to foreclosure. There have been cases where homeowners who paid off their mortgage were served with foreclosure notices.

15) In a very large number of these foreclosures, however flawed the documentation or however limited the process, there is no doubt that the homeowner is in default on the loan. There should be no room in this process for any homeowner to be rewarded for defaulting on a loan with a free home just because the legal title and note and lien are all compromised. The real issue here is that from the beginning of the securitization process, it appears as if the banks have subverted the private property rights guaranteed to US citizens under the 5th Amendment to the Constitution. Once the banks realized their claims were weak, they began to finesse this problem by submitting phony assertions that they had all the proper legal documents in order. This has compounded the situation grievously, to the point where the average person has a reason to distrust the sanctity of property rights in the US.

How Much of This is Fraud?

There is no simple answer to the question of whether all or part of this process is fraudulent. Lawsuits have been filed which claim that RICO standards for racketeering apply because from the very start of MERS banks knew that they were making false claims regarding their mortgagee rights and the similar right they assumed was vested in MERS. These charges of large-scale fraud also rest on the assertion that the fraud was part of a deliberate program to strip homeowners of the equity value they had built up in their property. These claims will be very hard to prove in court, lacking a bank memo from the 1990s specifically stating these intentions, or other such hard evidence. Similarly, no CEO is going to jail if there is no hard evidence that person was informed of the fraudulent nature of their business practices, and went ahead anyway in pursuit of these practices.

One of the other difficulties in proving this type of systemic fraud is that the bank executives can claim that everything was sanctioned by the regulators. Throughout the housing boom, regulatory forbearance in the face of egregious and risky practices by the bankers was the norm. The Federal Reserve under the direction of Alan Greenspan believed that the market was a far better regulator than Washington officials ever could be. When MERS was established during the Clinton era, it did not seem to occur to the regulators that a private system of recording property titles was going to be in any way flawed, even though there was nothing wrong with, and much to commend, the existing local government recording practices.

Lower level fraud may be easier to prove. Already the Justice Department is investigating multiple cases of fraud by mortgage companies in the processing of loans, especially the “Liar Loans” that asked for no information on income or assets. There seem to be plenty of cases of loan officers altering applications to improve an income amount in order to get approval for the mortgage.

Up to 40 state attorneys general have combined resources to investigate fraud in the foreclosure process. Whether this entails the bigger questions of MERS, mortgagee rights, and the separation of notes from the mortgage, remains to be seen. The scandal so far has focused on “robo-signing” by bank managers who attested to the courts that the documents submitted in a foreclosure were in order, when it was impossible for the manager to know this given the number of cases reviewed and approved each day. There is also reasonable evidence that law firms working for the banks falsified documents, forged signatures, and violated notarization standards. Any lawyer who knowingly participates in such a process has in the past been disbarred. These offenses should be readily provable if the evidence is there, and as of this week President Obama has endorsed these investigations and promises to provide federal help.

Given the history of federal government involvement with the housing crisis, it does not appear as if fraud charges will be leveled against executives in the banking industry. At the state level, however, attorneys general have been much more aggressive and may be able to collectively bring some of these executives to trial for nationwide offenses.

Longer Term Solutions

I’ve seen no better prescription for fixing these problems long term than the eight point list provided by Karl Denninger in his Market Ticker blog. Here is a summary provided by Mr. Denninger:

• Halt all foreclosures and sales - stand-still - until this process is completed. Those who currently have possession will continue to have it for the time being.

• Halt all mortgage payments where the servicer (the entity to whom the payment is made) is not the original lender, or where the loan was securitized. Instead, such payments are made to suspense accounts held by the Clerks of the Court in each county where titles are maintained and recorded. This is necessary in order to provide the essential motive of cooperation by those who allege they are owed the money.

• For each parcel with mortgage(s), those who claim interest must then come to court and prove it up with an unbroken chain of assignments. Provide a reasonable amount of time (one year?) for them to do so. If there are multiple claimants then the court must resolve who actually has standing and who does not. This will resolve with either one valid claimant or none at all.

• If there is one valid claimant, then that chain of assignments is recorded, the impounded funds are released, and the homeowner now knows who pay. If there are no valid claimants within the time provided then the title is quieted and a judicial release of liens is recorded. Either way, we resolve the land title problem and the entity entitled to receive the payment stream has proven their case and obtained a release of their funds.

• The lack of a valid claimant under state law does not extinguish the debt - only the security instrument. Those who think they're going to get a "Free House" are likely to be sadly mistaken. The creditor still has a claim for the money owed (if he can prove it up in court) and can enforce it via lawsuit as with any other unsecured debt but he can't seize the property in a foreclosure action. As with any claim of a debt in a court, the creditor still has to prove standing - which means he needs to prove the obligation was taken by the borrower and he has acquired sole and lawful ownership of that obligation. Note that this is similar to the above process but not identical - in many states it is entirely possible to irrevocably sever a security interest on real property, but that does not extinguish the debt - only the lien on the title.

• We MUST compel Trustees to audit all MBS files. If investors are holding an empty box they certainly have a cause of action. So far we have seen few of these actions, and no evidence that these audits were ever done - including at inception of the Trust. It was and is a legal duty of the securitizing parties to insure compliance with both the representations and warranties provided to investors regarding loan quality and IRS regulations. The proper "hammer" to wield here is via the IRS - these trusts must meet specific legal requirements in order to have and keep their "pass-through" status. Most of the scams and frauds, if they occurred in a given trust, would cause it to violate those requirements. We have a serious budget problem in the United States, and this is one way to help address it.
• We must enjoin by permanent legal process future subversion of land titles. This includes entities such as "MERS". If MERS wishes to "track" mortgages for people's convenience that's fine and well but that cannot be allowed to stand in for recordation of transfers of security and ownership interests. MERS cannot be allowed to replace, subvert or supplant the land title system in The United States. This is a State Law function - not a federal one and is well-supported in State Law. It is historically, and with good cause, vested at the level of the county government, where ad-valorem taxes are levied as well for local government support. As such any claim made by an entity such as MERS must have no legal standing whatsoever - recorded county records control, period.

• Where criminal conduct is found - whether it be securities fraud, control fraud, borrower fraud or any other sort of fraud, the case must be referred for prosecution. We must start with the "heads of the snakes" but we must not stop there. There are plenty of people who were involved in this and knew what they were doing was illegal - but didn't care. Most of the offenses involved are felonies, and we are well-beyond where we should be seeing indictments by the hundreds with civil forfeiture actions attached. Karl Denninger Oct. 10

Some Final Observations

The banking industry is anxious to get foreclosures on track again and quickly. There are reports that bank executives are meeting with executives from the title insurance companies to get them to lift their freeze on title insurance. According to these reports, the deal being discussed will involve the big banks providing guarantees to the insurance companies that any documentation problems in foreclosures going forward will be the responsibility of the banks, who will indemnify the insurers for losses they may suffer from such problems. This will apparently ease the concerns of the title insurers and it is estimated by the end of this week a deal will be done to lift the ban. Note first of all that this only covers future foreclosures; problems from past foreclosures will have to be resolved with other means. Second, two of these big banks, Bank of America and Citigroup, are still partial wards of the state, which means their guarantee being offered comes in part from you the taxpayer. It does not appear that these banks are asking the US Treasury whether it is okay for them to offer such an open-ended guarantee.

The Congress and the courts are faced with two fundamental paths to follow. One is to allow MERS claims to prevail, and thus upend almost two centuries of legal and business practice that not only safeguarded ownership rights, it worked well with nearly complete transparency. MERS would replace this with a chaotic system badly in need of reform. This decision would also permanently deprive local governments of the tax revenue they had earned from acting as public ministers working for the public trust.

The alternative path would be to turn down MERS and various bank solutions, and therefore declare invalid hundreds of thousands of foreclosures, and potentially millions of mortgages that have been tainted by being securitized through MERS. Mr. Denninger feels strongly that this is the only practical option for the government, especially if the rule of law is to prevail when it comes to property rights. There is no room in his view for a private system like MERS, and because trillions of dollars of mortgage backed securities will be considered invalid, the banks which sold these bonds will have to disgorge all the billions of revenue they earned from securitization. This will bankrupt most if not all of them.

A possible half-way solution for the banks would be to deny them the legal mortgage they are seeking as mortgagee, which gives them the right to foreclosure, and instead provide them with what is known as a "beneficial mortgage", which gives them the possibility of foreclosure under certain conditions. This is better than having nothing at all, and on balance declaring that the banks own beneficial mortgages may net them a smaller amount than full foreclosure, but certainly something better than zero. This may also give the banks greater incentive to work with homeowners on modifications, thereby keeping more people in their homes.

When people like Mr. Denninger make such proposals, it is often the case that banks or their supporters fight back by saying “you will destroy the banking system if you do that,” or “you will throw the economy into a depression.” Mr. Denninger will not be responsible for any such things, and the courts and the governments involved need to remember one basic fact: the banks caused this problem by subverting the existing government-managed title recording system, and then covered it up by resorting to phony if not fraudulent practices in foreclosing on millions of homes. When discussing whether to throw this problem back squarely on to the banks, it must be remembered that this is a national problem, and a national disgrace, of their own making. They alone are responsible for the consequences. Their demise is a small price for them to pay if their executives manage to avoid prosecution and jail terms.



Outstanding piece

Thank you for this excellent piece. The best I have read so far on the mortgage mess.

Most important fact on mortgage situation

Of all the things I have read about the current mortgage situation (and I have read volumes), this is by far the most enlightening and most important.

You brought out a fact that I have not seen mentioned and I never thought about - the absence of mortgages being recorded at county level. As you note, the legal implications of this change in the long history of mortgage 'law' is not obvious. Moreover, it seems to me, the economic implications resulting from legal uncertainties doesn't seem to be talked about.

Unlike, the past market debacles, this is not just about money. This is a complex law and legal labor situation. A TARP like money fix is not going to restore the market. Courts are going to have to make decisions and a lot of labor processing and resolving claims will have to be brought to bare.

The de facto change in mortgage law (county recordings) is truly the most telling event in this incredible juncture in economic history

Thank you for the work you did in writing this up.

Thanks Michael Collins

This is the best explanation of this mess!

Fraud is fraud

If MERS is involved in conspiracy to process fraudulently signed documents in the interest of securitizing them, then maybe they should not be securitized. Why not require all mortgages to be held by the banks that originate them?

Bypassing the recordation process invites fraud. Unwinding this mess should be accompanied by extinguishing the toxic securities. Innovation? No shit!

Frank T.

To find out who owns the mortgage, the loan, the "note"

For folks trying to fight fraudulent foreclosures, there is a website, Where's the Note?

which allows people to locate the holder.

With securitization and trading mortgages like baseball cards, this is a key piece of evidence in order to fight foreclosure.

We could probably use this URL repeated multiple times for homeowners hitting this site.

That's another point, this site pops up a lot in search engines and we have had many, many a desperate person leave a question in an anonymous comment trying to find information.

I believe it's our responsibility to help these people and locate real resources as best we can, so please answer them with the agenda to help regular folks, who are the same as ourselves, find the resources they need.

The pain over time in comments has been extreme, and if we can offer any additional help, resources, clue to help people, let's do it.

Thank you

This is by far the most informative article I've found on this subject. Thank you Robert for the link, I've been wanting to track our note, but, haven't had a clue where to start.
Our original loan has been sold several times, the bank that issued it is now defunct, so I don't know what that may mean .

As to the solutions offered in the summation. I see congress cowtowing to the banks, declaring MERS as the legal option. Whether this will be the straw that breaks the camel's back I don't know.

If ever there was a reason to follow the instruction of Thomas Jefferson regarding the change of government, I can see no better.

no kidding

If you find other useful pieces of help, real help, (to date I've found a lot of false help and we've written about how it's false), please post, at least in a comment so others find out about it.

In terms of changing of the guard, the political ads are so misleading, this season is beyond the pale, with GOP candidates capturing Populist issues, ignoring the fact their party policies will dig us literally to China....

(i.e. they are in bed with the U.S. Chamber of Commerce for one).

About MERS "employees"

On some website I have seen what purports to be an excerpt from a deposition of one of the officers of MERS. Deponent states that MERS has NO employees - only a board of directors.

I understand the need for the financial institutions to set up a system to track ownership of notes and changes in mortgagees. If they had created MERS and hired people to work there tracking these things and doing all the preparation of the assignment documents, and got them recorded at the county records depts, they'd have been fine.

However, out of pure greed they refused to even hire people to work at MERS, and willfully skipped the required execution of assignments. The sheer arrogance is astonishing - and I've been in financial services for over 20 years.

I can't find adequate words to express the level of my disgust. I am so glad that I no longer work for a bank.

Karl Denningers solution

Very nice article that should be given primetime exposure to some honest networks with hosts like DR show, Ed, 60 minutes
Diane Sawyer, Keith Oberman, even Kudlow might give this some honest dialog and create pressure to open the books.
The steps to the longterm solutions Karl shares are very likely going to expose the naked shorts that Goldman Sachs and others were pedaling an infinite cds or for simplicity let me say that the brokers on wall st were defacto creating money, hijacking the fed or counterfeiting. When we get to the truth we will find many investors were sold the same piece of the mbs that everyone else bought

Merton and Scholes

Their 1997 Nobel prize was for "a new method to determine the value of derivatives." It would be good for them to address the value of derivatives sold short as well as the toxic garbage that's on the books of our banks and the Fed. There is bound to be a lot of data and estimates available. As for missing data, these are two very smart guys (LTCM notwithstanding) -- they can solve that problem, and maybe help bankers and politicians face reality.

Frank T.

Black & Scholes

One of the two had already passed away and was awarded the Nobel post-humously.

Black was the one who had died

So the Nobel went to Merton and Scholes. They don't do posthumous Nobel prizes, otherwise there would have been three laureates for this work.

Frank T.


I have a question to add. Since none of the title records have been recorded with the county, does that mean there is no public record of a forclore auction to let local investors know of them. If so, this seems like it would gives the banks an unfair advantage to aquire the property back from there investors for a fraction of what they paid for it. Also who if any one is collecting insurance for the loss of value of forclosure sales.