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U.S. Mortgage Crisis: Where Does The Homeowner Stand?

Housing-Market / US Housing Feb 06, 2011 - 05:24 AM GMT

By: Stephen_Merrill

Housing-Market

Best Financial Markets Analysis ArticleOver the past several years, the real estate industry in the United States has undergone a near collapse. House prices have been reduced so far by 25% nationwide due to the bursting of real estate bubble. The only vibrant part of the real estate market in the present economic recovery is the millions of foreclosed homes being sold to bargain hunters.

Some smaller States, the Dakotas, Nebraska, Alaska, have managed to avoid a big downturn in prices and hope to continue to do so. The big States most affected by the real estate disaster though, California, Michigan, Nevada, Florida, have lost more than one-half on home values in many major cities.


There is one aspect of the home mortgage disaster that no State will be able to avoid though. This involves the mismanagement and fraud relating to mortgage loans that largely occurred after the loan closed and was recorded in the local courthouse as a lien on the property along with the new deed of ownership. This unlawful activity affects in some substantial way the validity of the great majority of mortgages issued over the past 20-years throughout the country, whether the loan payments are current or delinquent.

The History

The Wall Street investment banks, beginning in the late 1980s, initiated and bought millions of home mortgage loans to be repackaged as Mortgage Backed Securities (MBS) and sold to investors across the country and the world. In order to have their investment offerings certified as safe by the investment ratings agencies, the Wall Street banks used almost exclusively Fannie Mae/Freddie Mac qualified mortgages on the assumption such loans have already undergone a serious scrutiny under federal regulations. In reality though the two quasi-government agencies did little to oversee the quality of the of the mortgage loans they were certifying, buying and selling.

The MBS marketing effort worked. The ratings agencies, paid huge fees solely by the investment banks, certified the Wall Street MBS offerings as mostly prime-grade investments. Congress, Fannie Mae and the Security and Exchange Commission greatly encouraged the MBS trade. Now, millions upon millions of these same mortgage loans are delinquent, some for longer than two years. Millions upon millions more American households still paying their mortgage have a property that is worth far less now than the mortgage loan balance.

It has been discovered that most of the loans in the Wall Street MBS packages and those held by Fannie Mae/Freddie Mac, in fact, did not meet federal regulatory standards, not even close. Just about every player in the real estate industry had a large hand in this fraud: mortgage lenders, banks, sellers, buyers, brokers, appraisers, lawyers, middlemen, federal and state agencies, Congress and last five Presidents. The result is a home foreclosure rate that is unheard of already and looking likely to accelerate.

But the same Wall Street banks that bought off the ratings agencies and the government in order to cheat their customers and got away with it could not stop themselves from also committing massive tax evasion and the blatant violation of state laws across the nation with almost all of their MBS offerings. This is the fraud that might place the majority of US home ownership titles into serious question.

The Problems

Under state law generally throughout the country there are two essential elements to enforcing a delinquent mortgage loan by foreclosure. First, the foreclosure has to be sought by the recorded owner of the mortgage debt done through a Trustee designated in the recorded Deed of Trust that is signed by the homeowners. Second, that owner of the mortgage debt must possess all of the essential paperwork to conclude the foreclosure, including the mortgage loan promissory note signed by the homeowners at the loan closing and the proof of its ownership of the loan note by the entity seeking foreclosure.

Yet, the big investment banks decided it was too inconvenient and costly to comply with these laws. At the outset of the "securitization" process it was federal and state tax avoidance that motivated the banks to break state laws. At the end of the process, during the tide of foreclosures, it was the need to cover over the past fraud in mortgage loans by the use of even more fraud so home foreclosures could proceed apace. That is where we begin.

Robo-Foreclosures: Only the Veil

News reporting in recent months has brought to light that the Wall Street bank entities put together to service the MBS mortgage loans for their investors have been defying state procedural law in foreclosure proceedings. The big banks hired wholly unqualified people at near minimum-wage to sign off on thousands and thousands of foreclosures in a single day certifying that all the necessary documents have been read in full and complied with. Thus far, the banks and most of the media have characterized this "robo-filing" as having been just a cost-saving measure that can rather quickly be corrected by the banks through foreclosing again, if necessary. That could not be further from the truth.

A recent sampling of bubble era mortgage loans held by Fannie Mae/Freddie and MBS investors showed that approximately 90% had strong indications of wrongdoing in the valuation of properties, in the creditworthiness of the borrowers or in the manner the mortgage loans were packaged and sold to investors. The main reason firm conclusions were hard to draw from the study is because most of the documentation that would be direct proof of fraud had disappeared from the mortgage file. Even the original promissory note signed by the buyers at closing, the very debt that is owed, was often missing from the file. The crooks simply disposed of the smoking gun evidence before their crimes could be documented.

One would think when it came time to foreclose on homeowners these gaping defects would be apparent to all of the investment banks and the problems would be dealt with in a lawful manner. Something quite different happened.

Professional con artists used to assist unlawful bank foreclosures with forged documents had no scruples at all. The new creation of mortgage promissory notes complete with homeowners' signatures were openly for sale to banks online for as little as $35. An entire, newly invented and wholly forged loan package could be purchased for less than $200. These are the very original documents that are essential to a valid foreclosure proceeding under state law. To use such forgeries in a court proceeding is a very serious felony.

Clearly, the people foreclosed upon through these unlawful methods have the legal standing to set aside the foreclosure and again live in the home, even though someone else may have already bought the house and even though the previous mortgage, in fact, was seriously delinquent. That means if there is a foreclosure in the chain-of-title for your home there is some chance the previous owners will be returning suing you for possession of the house and the bank for damages. Since the necessary documents for foreclosure do not, in many instances, exist, often there is no easy fix possible by redoing the foreclosure on the previous owners. Fortunately, the new homeowners may be covered by a title insurance policy that was purchased at the closing on the house though many exceptions do apply. If there is coverage, the insurance company will have to defend the suit and pay any damages proven.

What has been a trickle of such suits thus far could easily become a tidal wave. Such a defect in your title may make it difficult or impossible to sell your home without first buying out the previous owner that was wrongfully foreclosed on or the MBS investor who says he or she should be getting paid instead. The new homeowner defendants in such suits will actually benefit from the case in the end because their house ownership title will now be clear.

REMICS, Securitization and Tax Evasion

There is a second major component to the problems with most US mortgage loans. In a rush to evade taxes at all levels, the Wall Street investment firms packaging MBSs for sale decided to drop mortgage notes into an owner-free legal zone.

Back in 1986, Congress created within the tax code what is called a Real Estate Mortgage Investment Conduit. (REMIC) This Reagan era legislation was an attractive feature of the then new field known as mortgage securitization. The REMIC option allowed the companies servicing mortgages to be exempt from capital gains taxation for the profits generated from mortgage loans. These service companies are wholly-owned creatures of the investment banks.

At about the same time, the New York legislature also conveniently allowed for state tax exemptions for REMICs. Since then, almost all Wall Street REMICs have been established to operate under New York law.

There is one major condition though to becoming a REMIC: No big liabilities may be held by the REMIC thereby making it "bankruptcy remote" under the tax law. Presumably, under the tax scheme, the investor owners of the mortgage loans would be the entity to pay capital gain taxes since they own the assets. If a REMIC itself owned its mortgage notes it would have to be assuming all of the liability to the MBS investors and could not therefore qualify for the tax exemption REMICs were established to take advantage of.

As the MBS trade gathered steam, its complexity increasingly made it impossible to say which investor owns any particular loan. In its latest form, REMIC investors were ranked by "tranches" with the bottom tranche taking all of the losses as they accrue. The obvious problem with this approach however was the failure to pass the mortgage notes to any owner thereby precluding foreclosure and even possibly collection on the mortgage note in any form under state law. The REMIC, after all, had posted oaths with the federal government and the State of New York that it did not and would not own the mortgage notes itself. To do so would be a serious felony.

So, until a mortgage loan went into delinquency it was impossible to tell which loans would end up "belonging" to the bottom tranche of MBS investors. For the notes that are being paid in a timely way, the vast majority of mortgages, there is no direct tie at all to the MBS investors. Right through foreclosure proceedings, there remain no written indications of direct mortgage note ownership by MBS investors or anyone else. Indeed, it was often the REMICs themselves that brazenly posed as the mortgage note owner during foreclosure proceedings on MBS properties.

Why the allegedly smartest people on Earth occupying Wall Street, who have lawyers at every corner office, allowed this to happen is hard to fathom. Greed, at best, is a partial answer. It may well be personal conceit so great the conclusion is drawn the law no longer applies to the big banks whenever the law is inconvenient. But all this did happen and the fiasco now threatens real property ownership throughout the United States. Incidentally, some of these very practices were widespread in the commercial real estate business as well.

These events also confirm the hopeless insolvency and eventual default of the biggest banks in the United States.

For the homeowner it means they may not be liable to anyone under their mortgage note. It means foreclosure may never be available to the bank. It also means it may prove all but impossible for the homeowner to extinguish the mortgage loan of record on their property.

As if quite enough had not already been done, the Wall Street investment banks also decided that preparation and payment for the mandatory recordation of mortgage note ownership in state courts was too bothersome and expensive given how quickly investor ownership turned over in MBS. This effectively stiffed every State and locality for millions and millions of legally required transactions. The State of California alone reckons it is owed as much as $120 billion in recording fees from the MERS (below), REMICs and other MBS entities or their investors.

To keep a second set of books on ownership of the MBS assets, the investment banks and Fannie Mae established what is known as the Mortgage Electronic Recordation System. (MERS) This laid a veneer of federal legitimacy to all of the corrupt practices within the MBS trade, soothing the concerns of investors and their lawyers. Though the MERS satisfied federal regulators somehow, the state courts, one after the other, are demanding that their long-standing laws protecting homeowners be complied with. The Supreme Court of Massachusetts has just ruled that MBS properties must comply with all State foreclosure requirements just like every other mortgage holder. Incredibly, the MERS presently contains some 62 million home mortgage loan transactions.

Before any foreclosure can properly proceed the owner of the mortgage note must, at a minimum, pay all recordation fees due under the note's chain-of-title. That is essential to showing the true, present beneficial owner of the Deed of Trust pledge is the party seeking the foreclosure. If a mortgage foreclosure has already been concluded by an entity that was not the recorded owner of the mortgage debt, the foreclosure may not only be invalid, but a later cure may also be impossible for the banks.

State Recordation Fees/MERS and More Tax Evasion

As if quite enough had not already been done, the Wall Street investment banks also decided that preparation and payment for the mandatory recordation of mortgage note ownership in state courts was too bothersome and expensive given how quickly investor ownership turned over in MBS. This effectively stiffed every State and locality for millions and millions of legally required transactions. The State of California alone reckons it is owed as much as $120 billion in recording fees from the MERS (below), REMICs and other MBS entities or their investors.

To keep a second set of books on ownership of the MBS assets, the investment banks and Fannie Mae established what is known as the Mortgage Electronic Recordation System. (MERS) This laid a veneer of federal legitimacy to all of the corrupt practices within the MBS trade, soothing the concerns of investors and their lawyers. Though the MERS satisfied federal regulators somehow, the state courts, one after the other, are demanding that their long-standing laws protecting homeowners be complied with. The Supreme Court of Massachusetts has just ruled that MBS properties must comply with all State foreclosure requirements just like every other mortgage holder. Incredibly, the MERS presently contains some 62 million home mortgage loan transactions.

Before any foreclosure can properly proceed the owner of the mortgage note must, at a minimum, pay all recordation fees due under the note's chain-of-title. That is essential to showing the true, present beneficial owner of the Deed of Trust pledge is the party seeking the foreclosure. If a mortgage foreclosure has already been concluded by an entity that was not the recorded owner of the mortgage debt, the foreclosure may not only be invalid, but a later cure may also be impossible for the banks. When fraud is used in an initial legal foreclosure proceeding, a second chance to foreclose is forfeited by law in most States.

The Present Posture

Until well into the collapse of real estate prices beginning in 2008, the investment banks managed to largely keep a lid on their nefarious business practices with MBSs. As the cover-up slowly melted away, the big banks convinced Congress last year to pass a law that abrogated all state law differences with the operation of the MERS as run by the investment banks and Fannie Mae. This new law was passed on a voice vote in both the House and the Senate thereby erasing any evidence of how a particular member of Congress voted.

Fortunately, before the measure could get to President Obama's desk for his signature, the fraud that is the MERS was already exposed nationwide. All fifty State attorneys general were already investigating the corrupt practices outlined on this page. Dozens of lawsuit had been filed nationwide by MBS investors, by homeowners, by state governments and by victims of foreclosure fraud seeking compensation for their losses. Many of those suits brought against the investment banks alleged violations of the Racketeer Influenced Corrupt Organization Act. (RICO) The federal act provides for criminal penalties and treble civil liability for unlawful activity undertaken in concert by wrongdoers. The allegation appears to be a perfect fit. As a consequence of all the public knowledge of corrupt banking practices, President Obama was forced to exercise a pocket veto of the Wall Street measure passed by its dutiful Congress. State laws remain in place on all of these issues.

About all that can be said to be positive for the investment banks right now is that their influence within the Bush and Obama administrations has thus far precluded meaningful investigation of their crimes by the federal government. No one yet is going to jail for one of the most widespread frauds in history. State prosecutors may not turn out to be so lenient with America's wealthiest.

On the substantial downside, the largest banks in the United States are liable back to their MBS investors for the faulty investment vehicles that were misrepresented to the buyers. To unwind the REMIC nightmare and maybe rejuvenate many mortgage loans, federal and state tax fraud must be admitted by the banks and all unpaid taxes with interest and penalties paid immediately. Millions and millions of homeowners may not legally owe anyone a dollar on the mortgages now being pushed back onto the investment banks by their investors. Every title insurer in the nation may seek indemnification from the banks and their cohorts for fraud. Every State and locality is owed huge sums for unpaid recording fees the investment banks should have paid along the way.

Even Wall Street's loyal servants in Congress and the White House will not be able to bail out the banks this time. There is not enough money in the world to do so. There is unfortunately far more the nation must suffer from the long-standing wrongdoing of its financial elite.

As you read this piece, flocks of the banksters are moving their ill-gotten wealth to safer havens overseas, far from the millions and millions of people who have been plundered. Their lobbyists back in Washington continue to flood the halls of Congress with campaign contributions, now largely aimed at blocking "foreclosure-gate" and handing the value of millions of mortgages directly to Wall Street bankers, simply forgiving their past greed, wrongdoing and incompetence at the expense of everyone else.

Hopefully, the constitutional prohibition on passing "ex post facto" laws, law that are passed to abolish a citizen's present legal rights, will stand for something in this biggest ever bailout effort. Possibly, not. Possibly, the ancient common law doctrine of never rewarding or condoning fraud will mean something. The fate for both legal doctrines lies ultimately with the third branch of government, our judiciary, federal and State.

What Options are Available to the Homeowner?

Is Some Measure of Justice Possible?



Your mortgage note could be affected by any of the wrongdoing that is outlined in this writing. You may have a clear legal case or it may be entirely murky. You may walk away without making another mortgage payment or you may have to pay the mortgage in full. What can be said to be true of all reasonable claims for civil liability though is that the vast majority of cases will be settled at some figure in between the extremes. For present homeowners there is also the need for clarifying your legal title as necessary to be safe.

It is important to bear in mind the ability of the big investment banks and their title insurers to cover these losses may erode quickly. Claimants at the front of possibly the longest line in history are more likely to resolve their case favorably and enjoy a clear legal title to your home. When the point of bank default does arrive, your remedies will likely be left to the tender mercies of the federal government. Limitations periods also apply to some claims.

Be assured the entity that is servicing your mortgage loan has by now become fully aware of its exact legal position when it comes to your mortgage. Should you not have the same knowledge?

By Stephen Merrill,

Stephen Merrill is a trial lawyer practicing in Anchorage, Alaska. He was a founder of the Tidewater Virginia Libertarian Party in 2001, the most successful Libertarian Party affiliate in the nation. He is now a founder of the Anchorage Tea Party.  Mr. Merrill is the editor of the Hampton Roads Freedom News.   http://FreedomNews.US 

© 2009 Copyright Stephen Merrill,- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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