Friday, October 8, 2010

What Is Going On With The Foreclosure Freeze?

A news story broke on October 4th that seven of the largest mortgage lenders were ordered by the Federal Government to review their foreclosure procedures. It seems that they have “discovered serious deficiencies” in their systems for processing foreclosures.

If you are involved in any sale of REO properties, negotiating a contract, or closing a contract on REO properties, you should immediately contact the listing agent or the REO management company to determine if the sale of that property is subject to this “freeze.”

J.P. Morgan Chase Bank announced it was freezing 56,000 foreclosures, joining Ally Bank (formerly GMAC) halting foreclosures in 23 Judicial Foreclosure states. There are a number of other lenders who have been contacted by the Federal Government, including Bank of America who suspended in all 50 states today, Wells Fargo, Citibank, HSBC, PNC Bank, US Bank, among others. This is tied directly to a practice called Robo-signing using a paperless loan registration system developed by Mortgage Electronic Registration Systems or MERS.

The Senate unanimously passed bill last week H.R. 3808 the Interstate Recognition of Notarizations Act that would allow Robo-signing and notaries signatures crossing state lines. The President vetoed.

The impact that this may have on transactions involving MERS Robo-signing issues that have already closed is not yet clear.
The impact of decisions by three major lenders to review their foreclosure procedures could hinge on reaction by lawmakers, and whether title insurers are willing to continue insuring title on distressed properties and bank-owned REO homes.

Citigroup and Ally Financial (GMAC) and MERS have been sued for Racketeering over their loan database by homeowners in Kentucky for allegedly conspiring with Mortgage Electronic Registration Systems Inc. (MERS) to falsely foreclose on loans.

MERS is the company that handles mortgage transfers among member banks. The suit claims that though MERS the banks are foreclosing on homes even when they don’t hold titles to the properties.

“Defendants have filed foreclosures throughout the state of Kentucky and the United States of America knowing that they were not the ‘owners’ or beneficiaries of the loan they filed foreclosure upon.” The homeowners wrote in their complaint filed Sept. 28th in federal court in Louisville, Ky.

The suit claims that the defendants filed or caused to be filed mortgages with forged signatures, filed foreclosure actions months before they acquired any legal interest in the properties and falsely claimed to own notes executed with mortgages. The case is Foster v. Mortgage Electronic Registration Systems Inc, 10-cv-611, U.S. District Court, Western District of Kentucky (Louisville.)

Lawyers throughout the country increasingly are challenging the MERS approach, questioning whether the company has the legal right to foreclose on homes, on the grounds that it doesn’t actually own mortgages or the notes. This argument is gaining traction with some judges. Concerns about improper paperwork have caused the halt of foreclosures until companies can provide proof that they own the mortgages and have a right to seize the houses.

MERS is an integral part of the system that emerged during the global housing boom, when mortgages were packaged and repackaged so quickly that financial firms had neither the time nor the patience to file paperwork in local courthouses as the loans were traded. By using MERS, lenders were able to reassign loans quickly and cheaply, but didn’t go through normal legal channels at the local levels of processing deeds and documents, making it very difficult to follow a chain of ownership without leaving a paper trail.

The MERS registry tracks more than 65 million mortgages throughout the country, approximately 95% of all loans written since around 2000. It has been the vehicle that has allowed the rapid-fire transfers that went with the heavy demand for the mortgage-backed securities.

As different courts increasingly have begun to nullify the MERS model, this could call into question the legitimacy of millions of mortgages, wreak havoc on the real estate market, spur costly litigation against Wall Street banks and ultimately harm the broader financial system.

The land title system that went largely unchanged in the United States for centuries became an obstacle in the 1990s. That is when financial firms began to ramp up a process called securitization, bundling and selling pools of home loans to sell to investors. Each time the loans were reassigned, the new owner had to record the transfers with local clerks. That is where MERS came to be.

Several executives in the mortgage industry came up with a faster, easier, and cheaper approach be creating MERS. The list of MERS shareholders includes an array of banks, lenders, and title companies. Among them: Fannie Mae, Freddie Mac, Bank of America, Ally Bank, Washington Mutual, Wells Fargo, and AIG’s United Guaranty Corp.

In the legal filings against MERS by several legal services companies from NY claim that though MERS is not a mortgage lender; nor does it ever own or have any beneficial interest in the note or mortgage. Nevertheless, MERS substitutes its name on the public records for the name of the actual owners of mortgage loans. In doing so, MERS is rapidly undermining the accuracy of the public land and court records databases, establishing in their place a proprietary national electronic registry system that “tracks” ownership and servicing rights and whose information is inaccessible to the public.

The argument is that MERS system truly hides the true note and mortgage holder and the insulation of the holder from potential liability in situations involving predatory loans. They claim MERS to be fundamentally unfair to homeowners who are trapped in the system because it transmutes public mortgage loan ownership information, required to be recorded in the public databases, into secret and proprietary information, inaccessible to both the borrower of the public.

In fact, the identity of the servicer is perhaps the only information homeowners know about their loan once MERS is involved. MERS does not offer homeowners access to learn who actually owns their note and mortgage; indeed MERS does not track that information itself. This is a key piece of information that homeowners no longer possess and are unable to access because MERS has eliminated it from the public records.

MERS legal counsel wrote this in an opinion letter; “there is no reason why, under a mortgage, the entity holding the note may not keep the fact of its ownership confidential. The public has no significant interest in learning the true identity of the holder of the note.”

In a 2001 Opinion of the Attorney General of the State of New York:

“Designating MERS as the mortgagee in the mortgagor-mortgagee indices would not satisfy the intent of Real Property Law’s recording provisions to inform the public about the existence of encumbrances, and to establish a public record containing identifying information as to those encumbrances. If MERS ever went out of business, for example, it would be virtually impossible for someone relying on the public record containing identifying information as to those encumbrances or to ascertain the identity of the actual mortgagee of record.”

Before MERS, the easiest way to determine the current owner of the note was to check the public records for the last assignment of the mortgage. In the MERS system, however, assignments are never filed except when the mortgage is initially assigned to MERS or assigned to a non-MERS member mortgagee. As a result when MERS is the nominee for a mortgage, the homeowner cannot determine who owns the note by checking the public records, nor can they obtain this information from MERS. The MERS system thus actively subverts the public policy of maintaining a transparent, public title history of real property.

With MERS, most homeowners only know the servicer of their loans. Yet the owners of the loan retain the power to make certain decisions about the loan. The MERS filing spreads a cloak of invisibility over any member mortgage/note-holder that purchases a loan following origination.

This MERS model is going to be under further scrutiny by local governments all across the country as this becomes more in the spotlight. By subverting the public function of the county clerks and interfering with the collection of funds owed to the public for these deed transfers and document fees, it has at a conservative estimate circumvented those counties governments across the country from more than $2.6 billion. This number was the estimate from when they had reached 40 million mortgages in April of 2006, not the 65 million mortgages today.

The key component to this the new model created by MERS to split the mortgage and the note. What was always the standard principle was the mortgage follows the note. In 1997 an Illinois Court noted, “It is axiomatic that any attempt to assign the mortgage without transfer of the debt will not pass the mortgagee’s interest to the assignee.” MERS has no status as mortgagee if the note is in fact owned and held by another entity, as is always the case with MERS. Thus, MERS’ status as mere nominee is insufficient to give it standing to foreclose, or take any legal action against a borrower whatsoever.

All the while the number of foreclosure starts had continued to ramp up. In August of 2010 there were 258,528 foreclosures initiated by lenders which is the highest level since July 09.

There was a vote that happened very quietly in the Senate September 27th, the day before the Senate recessed for midterm election campaign. H.R. 3808, “The Interstate Recognition of Notarizations Act of 2010”, designed to gain full recognition of notarization in federal courts of any lawful notarization made by a notary public licensed or commissioned under the laws of a State other than the State where the federal court is located, this includes computerized notary signatures. (Robo-signing) This bill would effectively take care of one of the problems that has caused the freeze on foreclosures, but doesn’t address the issue on the unknown note holder.

This bill was first introduced by Rep. Robert Aderholt (R-AL) in April of 2005. At that time mortgage documents were not the reason, it was to overcome the problem of some states not recognizing the authority of signatures from outside their state slowing down interstate commerce.

After languishing for months, actually doing so each year since 05, in the Senate Judiciary Committee, the bill passed the Senate with warp speed and with little if any public awareness of the bills existence. The bill’s approval involved the use of a special procedure. Democrat Senator Robert Casey, on behalf of the Senate Leadership, had the bill taken away from the Senate Judiciary committee, which hadn’t acted on it. The full Senate immediately passed the bill without debate, and by unanimous consent.

Shortly before the Senate’s recess, Judiciary Committee Chairman Patrick Leahy pressed to have the bill rushed through the special procedure, after Leahy’s “constituents” called him and pressed for passage. Leahy’s staffers spoke of the unusual display of bipartisanship, Senator Jeff Sessions, he committee’s senior Republican, also helped to engineer the Senate’s unanimous consent for the bill.

The bill was put on the President’s desk to sign, and he chose to allow the 10 days to expire and not sign it, using the “pocket veto.” Now the NAACP, the Center for Responsible Lending, and other civil rights groups, along with Congressman Grayson of Florida, are pushing for a national moratorium on foreclosures, citing doubts about procedures followed by lenders filing foreclosure proceedings.

“Until lenders demonstrate that they are adhering to all existing laws, regulations, and contractual guidelines related to loss mitigation and foreclosure legal process, lenders in all 50 states should not move forward with any foreclosures.” The Center for Responsible Lending.

Bottom line, this is going to take a while to undo. This is going to likely take legislation to get title companies comfortable again. I don’t see that happening until the next Congress in 11.

This is going to be very hard on the Real Estate and Mortgage Lending business, the banks who hold the debt on these non-performing loans, and the economy as a whole. I was listening to a speech by Congressman Grayson from Florida, and in it especially knowing his record, there seems to be a foreshadowing of trying to use this as a catalyst for the largest transfer of wealth in human history by claiming that the banks can't show proof of a legal note, so the "poor homeowner" who isn't making their payments now own it free and clear. Hopefully that is just paranoia setting in after a lond day of studying this. But those thoughts are being said both by those who want it and those who are afraid of it.

What needs to be considered here are a couple things. One, this MERS and lack of documentation needs to be seriously addressed. However, the most urgent thing is to get these foreclosures into the market to get rid of this shadow inventory hanging over the head of our economy like an old wet blanket. The average foreclosure today doesn't happen until nearly 450 days from the first notice, with the borrower not paying any payments during that year and a half. They are not the victims in this. Keep in mind if the average mortgage payment in America is about 1,000.00/mo and you don't make a payment in 18 months, that is 18,000.00 dollars in benefit that person already has. Hopefully that puts another perspective on these "evil" banks.


  1. You mention at the end of the article that the homeowner skipping 18 payments gets the benefit of $18,000 - which puts another perspective on these "evil" banks.

    I vehemently disagree! The banks ARE the evil here. They made loans they knew were illegal. They tricked people into signing over their homes as security for fake money created out of thin air.

    Then, the banks pocketed fee after fee after fee in an endless refinance cycle. Each refinance a dead spiral of debt and slavery for the homeowner.

    I say, give the banks their due. They defrauded the homeowner. Cancel the Note. Burn the Mortgage. Give the Homeowner what is rightfully theirs: their home.

  2. Lucy,

    Please try to see the bigger picture. Granting anyone free access to a mortgaged home for 18 months, then cancelling a legal contract and making the lender surrender the property would cause severe damage to the mortgage industry as a whole. What you propose would invalidate the only reason any bank would have to loan money.
    In my opinion, the biggest problem is a lack of consequences related to bad behavior. Both the lenders and borrowers are to blame. However, predatory lending by some banks does not justify the invalidation of legal contracts.
    I doubt very many of these so called victims could have paid in full for their home. Therefore, they would not be there without some form of financing. We need a society where each individual is responsible for knowing whether or not they can afford to purchase the things they desire.
    I am not trying to defend banks, I am trying to remove the emotion and focus on a realistic solution to an extremely serious problem.
    I welcome your comments both pro and con.



  3. Lucy, I understand your frustration, and yes there were abuses by lenders, but when dealing with the law, there were many people who I have sold over the years that I wouldn't have loaned lunch money to. However, if I would not have sold to them when they walked in with their pre-approved loan from one of the many programs that our Federal Government required be available to "help those who traditionally couldn't get mortgages into homeownership," I would have given them one in court.
    If this is pushed to the banks forfeiting their rights to the notes, it will collapse are already weakened system, pushing the final nail in the coffin of our Republic with the Cloward-Piven dream situation. Banks do not want foreclosures, they lose their butts on them. But they have to clean up their accounts before they can move forward, as do those who are living in those houses for free today.
    As the market has fallen, compounded by Mark to Market accounting that Congress saddled us with in the lending institutions in 07, it has spiraled to hurt those who were making their payments, but have lost their jobs.

  4. In my opinion the best way to clean up this mess will be in a multi-part way, instead of trying to do so with one fell swoop.

    1. First we have to get the houses stuck in the freeze moving through the system once again, getting this shadow inventory out on the market and into new hands.

    2. Second we have to deal with the notary issue on these 65 million loans plus. That bill that just passed is probably a good idea, it is a one page bill, easily understood, no hidden junk.

    3. Third we have to address the disconnect with the separation of all of those notes and mortgages, reconnect them, and bring back transparency.

    4. Fourth we need to get the "paper trail" electronically at least through all the County Court House records for each transaction so that anyone at any time can access them when needed as the laws and practices have done since nearly our founding. As well as compensate these municipalities for this service.

    However, number one is critical to resolve quickly then work on the others. Our economy is dependent on the housing market, always has been, it has to heal before our economy can.

  5. What is an "Illegal Loan" ... seriously, if the bank committed fraud, legal fraud not peoples opinion of fraud, the contract is up for legal review by a judge. But if you signed a contract and it turns out bad later, that not an illegal loan. If housing prices stayed high and the people still had positive equity, would the loans be illegal then?

    Most mortgage documents have the principle amount, interest rate, and the kind of rate ie fixed or adjustable. Where is the fraud?

  6. Agreed, Mark-Anthony. These were no illegal loans, and I do not believe that their was any malicious intent, just trying to streamline the system to work more efficently. Now, the results of that might be less than stellar, but if everyone keeps their heads about it, it should be something that can be worked out.
    I am just thankful that the progressives will be out of power and not able to turn this into a wealth transfer to minorities and the "poor" who they are pushing as those most damaged by these forclosures.
    Let's look at that damage for those who "lost" their home to forclosure who were sub-prime buyers. Many of these loans were no doc, no down, with credit scores as low as 500. They then lived in the new home for two years before the taxes became due (at least in Indiana) then they can't make the payments or choose not to. On average now they will live in the home for free for around 450 days AFTER the first foreclosure notice, which wouldn't come for at least 60 days of no payments, so about 17 months of living for free. No rent, nothing, FREE. When you put nothing into the house, live in it for a year and a half with no payments, who is taking advantage of who? The bank or the buyer?

  7. This is a reply by the CEO of MERS. I hope he is right.

  8. I so agree the banks are the evil here. Also some borrowers did sign the documents without reading and now they are going for a foreclosure freeze.

  9. Banks and Master servicers got paid multiple time for those mortgage from (CDS)Credit Default Swap. The reason why they got paid multiple times is because it's been sold Multiple times to different investors(Different pools of Mortgages). AIG had to pay out on those defaulted Mortgages. Which by the way, paid for by taxpayers. The billion dollar questions is is why the servicer is trying to foreclose when the master Servicer and the banks got PAID multiple times. why are they trying to paid AGAIN? that is the fraud...