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L. Randall Wray puts it right on the table: "Here's the deal. This financial crisis is like Shrek's onion. As you peel back layer after layer of sleaze, you find that the whole damn thing is fraud. We are talking about tens of trillions of dollars of it. Tens of thousands of individuals were involved. It was thorough. It was blatant. It was even transparent, right under the noses of regulators and supervisors. It was normal business practice. It never had any fear of prosecution or punishment. Even today, it taunts the impotent administration, daring President Obama to do anything."

In Boulder, Colorado, the true cost of the foreclosure crisis becomes clear as a disabled former homeowner is awakened to a Sheriff's eviction, 12/11/09. (photo: John Moore/Getty Images)
In Boulder, Colorado, the true cost of the foreclosure crisis becomes clear as a disabled former homeowner is awakened to a Sheriff's eviction, 12/11/09. (photo: John Moore/Getty Images)



Anatomy of Mortgage Fraud

By L. Randall Wray, Reader Supported News

16 December 10

 

n two recent pieces I harped on the problems at MERS, the Mortgage Electronic Registration System. ("Support Representative Kaptur's Bill: Time To Shut Down Mers And To Restore The Rule Of Law" and "Shut Down MERS"). Briefly, MERS purportedly offers an alternative to paperwork, maintaining an electronic record of mortgages that are usually packaged into mortgage backed securities (MBSs). When mortgages go delinquent, MERS helps mortgage servicers foreclose on homes.

I argued that MERS was created to run multiple frauds, a topic I will discuss in more detail in part two of this series. However, one of the big puzzles of the ongoing foreclosure crisis concerns the whereabouts of the "wet ink notes" -- the IOUs signed by borrowers. In foreclosure cases across the nation, the banks have been filing "lost note affidavits", certifying that they cannot find the notes that are required to prove that they have the right to take away someone's home. In some cases, the notes miraculously appear, seemingly out of nowhere, and in others "Burger King kids" have been manufacturing them for robo-signers. By law, the notes are supposed to be at REMIC trustees, held against the MBSs sold on to investors -- and must be presented to foreclose.

The real mystery is why these trustees cannot produce the notes. I think we have finally found the smoking gun. An interested reader alerted me to MERS's instruction manual, "MERS Recommended Foreclosure Procedures -- State by State", originally written in 1999, updated in 2002 and available on MERS's website (accessed by clicking on: Recommended Foreclosure Procedures).

The first thing to note is the date. Folks, this strategy was formulated in 1999. The second thing to note is these documents demonstrate that failure to properly endorse the notes and transfer them to the REMIC trustee was not an occasional mistake, but rather was MERS's business model. As we will see, MERS planned from the get-go to defraud the counties, and the IRS, and the homeowners, and the buyers of the mortgage-backed securities.

Let me provide three very clear quotes (emphasis added) from the document, and then I will explain the implications. To demonstrate that these quotes are not slips or errant comments I am appending at the bottom a couple of dozen more quotes from the manual with virtually identical wording.

We have been advised that the named plaintiff in the foreclosure action should be both the record holder of the mortgage and the owner and holder of the promissory note. This is typically considered to be the servicer because if the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having its employees become certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Therefore, MERS is both the mortgage holder and the note holder as nominee for the current servicer. Page 62

...
Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights of the promissory note. Page 50

...
During the redemption period, MERS will be considered to be titleholder. However, at the end of the redemption period, a deed to the investor should be executed as soon as possible so that MERS remains in the chain of title for as short a time as possible. Page 54

The foreclosure manual establishes three key points that we have long suspected:

  1. Mortgage notes were not typically transferred to the trusts, as required by law. Further, there is no clear "chain of title" for these notes--which are actually presented for endorsement only on foreclosure (if then).
  2. MERS recommended that mortgage servicers retain the notes.
  3. MERS "deputized" employees of the servicers, pretending that these became MERS employees. This allowed the fiction that MERS had the notes so that it could foreclose.

I will discuss in part two the implications for the REMICs and the mortgage backed securities. Here I will focus only on the failure to comply with the requirement to properly endorse notes and to transfer them each time a mortgage was sold -- up to a dozen times over the course of the life of a mortgage through to foreclosure. Rather than following well-established law, MERS plainly directed mortgage servicers to retain the notes. Since most mortgage lenders and servicers are members of MERS, the plan was to pretend that transactions were "in-house", hence did not require transfers of notes or reporting of sales to the county recorders.

In the document, MERS claims that its recommended procedures are "customary". In fact, there are several hundred years of "custom" that requires endorsement of notes at the time of transfer, with a clear chain of title to ensure that anyone who claims to be a creditor, and who tries to seize someone's home, has clear documentary proof of entitlement. What MERS proposes in this document is to break the chain of title, to eliminate the protection that debtors need to prevent mortgage servicers and MERS from illegally stealing their property through the use of robo-signers and the manufacture of fake documents. In other words, both law and custom were formulated to prevent the sort of foreclosure fraud that has become normal business practice -- what the MERS document calls "customary".

I do not know why MERS proposed illegal activity as a new custom. It appears that MERS wanted to keep the notes handy, held by the servicers, to speed the foreclosure process -- in other words, to run foreclosure mills. Perhaps MERS foresaw, even in 1999, a wave of foreclosures. Why else would it recommend multiple frauds (as explained in part two), urging servicers to keep the notes rather than passing them along to trustees? It now seems most likely that the fraudulent practices were recommended as a means to speed the illegal foreclosures we are now witnessing.

Remember, the servicers are the same fraudsters who are losing mortgage payments, sending foreclosure notices to the wrong homeowners, telling homeowners to skip payments so that they can qualify for modifications -- then stealing their homes, and in some cases delaying foreclosures in order to maximize late fees and penalties.

Okay, but if the servicers hold the notes, why on earth can't they find them--why do they need to file "lost note affidavits"? In a word, fraud. If they now produce the notes, it will be clear that they were not properly endorsed each time the mortgages were transferred. And they were never held by the REMIC trusts. As I will explain, that means mortgage backed securities are fraudulent and the banks are on the hook for hundreds of billions of dollars. And that the banks holding the mortgages cannot legally foreclose. That is why they are destroying the documents, and hiring robo-signers to forge new ones.

When it comes to Wall Street, things are always worse than they seem. As the reader wrote to me:

These financial institutions that defrauded homeowners, then bet against them with a stacked deck of accomplices such as MERS, mortgage servicers, foreclosure mills and others have taken predation beyond previously known levels and executed financial crimes for which they must be fully prosecuted.

Or, one might think, shot.

Here's the deal. This financial crisis is like Shrek's onion. As you peel back layer after layer of sleaze, you find that the whole damn thing is fraud. We are talking about tens of trillions of dollars of it. Tens of thousands of individuals were involved. It was thorough. It was blatant. It was even transparent, right under the noses of regulators and supervisors. It was normal business practice. It never had any fear of prosecution or punishment. Even today, it taunts the impotent administration, daring President Obama to do anything.

And it expects to win. The fraudsters have Congress in their back pocket and plan to rush through legislation to validate ex post all of their illegal activity. It is almost a foregone conclusion that Congress will pass a law early next year to legalize everything MERS and the big banks did -- lending fraud, recording fraud, tax fraud, securities fraud, and foreclosure fraud. There will be no rule of law to protect private property in the United States. Wall Street can claim any property it wants -- no proof required. That is what President Bush meant when he proclaimed a new "Ownership Society" -- as I wrote back in 2005. The plan all along was to put the bottom four deciles of Americans into permanent indebtedness while the top fraction of one percent would transfer ownership of everything to itself. So far, President Obama has stuck with the program -- overseeing the greatest wealth transfer in human history.

********

Key quotes from the MERS document

According to the document, MERS's mission statement reads as follows:

What is MERS?

MERS serves two purposes. First, it is a national electronic registry for tracking servicing rights and beneficial ownership interests in mortgage loans. Second, MERS acts as nominee (a form of agent) for the servicer and beneficial owner of a mortgage loan in the public land records. MERS is designed to operate within the existing legal framework in all U.S. jurisdictions and did not require any changes to existing laws.

How is this made possible? Its members appoint MERS as the mortgagee of record on all loans that they register on the MERS System. This appointment eliminates the need for any future assignments when servicing rights are sold from one MERS Member to another. Instead of preparing a paper assignment to track the change in the county land records, all subsequent transfers are tracked electronically on the MERS System.

MERS does not create or transfer beneficial interests in mortgage loans or create electronic assignments of the mortgage. What MERS does do is eliminate the need for subsequent recorded assignments altogether. The transfer process of the beneficial ownership of mortgage loans does not change with the arrival of MERS. Promissory notes still require an endorsement and delivery from the current owner to the next owner in order to change the beneficial ownership of a mortgage loan.

MERS explains the registry process as follows:

With every new loan that is registered on the MERS System, it becomes more likely that you will come in contact with a mortgage loan having MERS as the mortgage holder in the chain of title. MERS is put in this position in one of two ways: the first is by an assignment from a lender or servicer to MERS. This method is usually associated with bulk transfers of servicing. The second way is with the lender naming MERS as the mortgagee of record as nominee for itself (and its successors and assigns) in the original security instrument at the time the loan is closed. We call this second option "MOM", which stands for MERS as Original Mortgagee.

"MOM" was a significant milestone for MERS and the mortgage industry. Fannie Mae, Freddie Mac, and Ginnie Mae have each approved the use of MERS as original mortgagee as nominee for a lender on the security instrument for loans sold to them and registered on the MERS System.

In order to make MOM work, changes were made by Fannie Mae and Freddie Mac to their uniform security instruments allowing MERS to be named as the mortgagee in a nominee capacity for the lender. First, to reflect the interrelationship of the promissory note and mortgage and to ensure these two instruments are tied together properly, the recital paragraph names MERS, solely as nominee for Lender, as beneficiary. Second, it is made clear that the originating lender rather than MERS is defined as the "Lender". This change was made so that everyone understands that MERS is not involved in the loan administration process. Third, as mortgagee of record, MERS needs to have the authority to release the lien of security instrument, or if necessary, foreclose on the collateral on behalf of the lender. Such authority is provided by adding a paragraph to the security instrument informing the borrower that MERS holds only legal title to the interests granted by the borrower. It also informs the borrower that, if necessary to comply with law or custom, MERS may exercise the right to foreclose and sell the property and may take any action required of the Lender to release or cancel the security instrument.

Once MERS is named in the original security instrument or by way of an assignment, the document is then recorded in the appropriate public land records. From this point on, no subsequent assignments of the mortgage to a MERS member needs to be recorded. MERS remains in the land records, as mortgagee, throughout the life of the loan so long as servicing is not sold to a non-MERS member. All subsequent transfers of ownership in mortgage loans and servicing rights for that loan are tracked electronically between MERS members through the MERS System. This process eliminates the opportunity for a break in the chain of title.

So the basic scam is that when a loan is securitized, MERS is named as the mortgagee of record ("MOM"). Yet MERS does not hold the note. Instead, MERS pretends to hire someone in the firm that holds the note to maintain the fiction that it has got the note. Yet, it is the REMIC trustee that must hold the note to make the securities lawful. It is clear throughout the document that proper procedure is never recommended by MERS, instead, it is recommended that the servicer hold the note in almost all cases.

Here follow direct quotes from the document, as they appear but with emphasis added.

Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note.

If the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Pg 22 MERS doc

If the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having its employees become certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Pg 34

Please Note: Fannie Mae's foreclosure regulations require an assignment from MERS to Fannie Mae in the Parish of Orleans. This means that Fannie Mae will be the foreclosing entity. This is the same requirement that exists when the servicer is the record mortgage holder.

Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note.

possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Pg 44 (Note: something was omitted here. This is exactly the way it reads on the page.)

If the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of (Note: something missing here also)

MERS should remain as the titleholder for as short of time as possible. Pg 45

We have been advised that the named plaintiff in the foreclosure action should be both the record holder of the mortgage and the holder of the promissory note. This is typically considered to be the servicer because if the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan.

Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note. Pg 46

Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights of the promissory note. Pg 50

During the redemption period, MERS will be considered to be titleholder. However, at the end of the redemption period, a deed to the investor should be executed as soon as possible so that MERS remains in the chain of title for as short a time as possible. Pg 54

We have been advised that the named plaintiff in the foreclosure action should be both the record holder of the mortgage and the owner and holder of the promissory note. This is typically considered to be the servicer because if the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having its employees become certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Therefore, MERS is both the mortgage holder and the note holder as nominee for the current servicer. Pg 62

Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note. Pg 63

Please Note: Fannie Mae's foreclosure regulations require an assignment from MERS to Fannie Mae in New Hampshire. This means that Fannie Mae will be the foreclosing entity. This is the same requirement that exists when the servicer is the record mortgage holder. Pg 66

If the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Pg 68

Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights of the promissory note.

If the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Pg 70

We have been advised that the named plaintiff in the foreclosure action should be both the record holder of the mortgage and the holder of the promissory note. This is typically considered to be the servicer because if the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan.

Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note. Pg 76

Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note.

If the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan. Pg 80

Please Note: Fannie Mae's foreclosure regulations require an assignment from MERS to Fannie Mae in Rhode Island. This means that Fannie Mae will be the foreclosing entity. This is the same requirement that exists when the servicer is the record mortgage holder. Pg 87

Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial right to the promissory note. Pg 88

We have been advised that the named plaintiff in the foreclosure action should be both the record holder of the mortgage and the holder of the promissory note. This is typically considered to be the servicer because if the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan.

Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note. Pg 89

Even though the servicer has physical custody of the note, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial right to the promissory note. Pg 91

MERS prefers to not take title to the property, so the Certificate of Sale should be assigned if possible. However, either option is acceptable. Pg 92

MERS should only be in the chain of title for as short of a time as possible. As soon as the eviction is completed, the deed to HUD should be recorded. Pg 94

The servicer usually has physical custody of the note at the time of the foreclosure with a blank endorsement. This makes the servicer the noteholder for the purposes of foreclosing. However, custom in the mortgage industry is that the investor (Fannie Mae, Freddie Mac, Ginnie Mae or a private investor) owns the beneficial rights to the promissory note. Pg 99

We have been advised that the named plaintiff in the foreclosure action should be both the record holder of the mortgage and the holder of the promissory note. This is typically considered to be the servicer because if the promissory note is endorsed in blank and the servicer has physical custody of the note, the servicer will technically be the note holder as well as the record mortgage holder. By virtue of having the servicer's employees be certifying officers of MERS, there can be an in-house transfer of possession of the note so that MERS is considered the note holder for purposes of foreclosing the loan.

MERS should only remain the titleholder for as short as time as possible. A subsequent deed should be executed to the investor immediately. Pg 100

Local Counsel advises that the promissory note is endorsed to the servicer prior to commencing a foreclosure so that the servicer becomes the noteholder. In order for a foreclosure to be brought in the name of MERS, the note should be endorsed to MERS so that MERS is the noteholder. Pg 102

In part one of this series I showed that MERS recommended that mortgage servicers retain the "wet ink" notes that borrowers signed. These notes are required in 45 states to foreclose on a home. Not only does the foreclosing party need to physically hold the note, but the note must be properly endorsed and transferred every time a mortgage is sold. A clear chain of title must be demonstrated to make the note valid. This is to protect borrowers from fraud -- no one can manufacture a note, claim to be a creditor, and then take a homeowner's property. And this is especially important when mortgages are securitized and bought and sold a dozen times -- if there is no clear chain of title, the borrower can never be sure who is really the creditor.

But, in fact, the notes were never transferred, there is no clear chain of paperwork, and in many cases the notes have "disappeared" so that when the servicers or MERS tries to foreclose, they must file "lost note affidavits" claiming rightful ownership even though they do not have evidence. They have also been caught using "robo-signers" to forge documents -- and sometimes they have foreclosed on the wrong properties and even seized homes on which there was no mortgage. That is precisely why the law requires proper transfers of the note. Without that, the mortgage is a fraud and foreclosure is fraudulent.

By itself, all of this is a horrific scandal, involving up to 65 million mortgages -- the number of mortgages registered at MERS, most of which presumably were subjected to MERS's guidelines and extremely sloppy record-keeping. But like Shrek's onion, it is much more complicated than that -- with layer after layer of fraud piled on fraud. There are many angles to be explored, most of them too complex and arcane to be pursued in a short column. Here, in part two, I will discuss the implications for the securities that bundled the fraudulent mortgages registered at MERS. Not only did MERS defraud the counties out of their recording fees and the homeowners out of their homes, but it also helped to perpetrate securities fraud and federal tax fraud. Fortunately for the investors in these securities, the securitization process was fatally flawed, meaning that they can return to the issuing banks and demand their money back. But that implies, of course, that the banksters are hopelessly insolvent -- on the hook for hundreds of billions of dollars.

Inevitably, they will turn to Uncle Sam for more handouts. Get ready for more backroom deals made by the Fed and Treasury to rescue firms like Bank of America. If you loved the first three rounds of this financial crisis, you will love the next six rounds as markets pummel Wall Street banks, with Uncle Sam as referee applying the smelling salts to revive it for yet another round (whilst its CEOs skim more billions off the top in compensation). Ultimately, it will not work. Wall Street will go down for the count -- but probably not until it drags Main Street through a great depression that your great grandkids will study in the history books. And, by the way, they will laugh at the misguided efforts of the thoroughly compromised one-term Obama administration that focused its efforts at budget-balancing in the face of the worst headwinds America had ever seen.

MERS and Securitization

Recall from part one that mortgage lenders and servicers are members of MERS, with one employee of each deputized by MERS. This allowed the fiction that resales of mortgages are merely in-house transfers and hence there is no need to pay a recording fee to the county where the property is situated. MERS claims to be the mortgagee of record, holding the mortgages for its members. At the same time, it recommends that servicers retain the notes, but since these are members of MERS, and since MERS has an employee in each, MERS claims it has the legal standing to foreclose on delinquent borrowers.

Mortgages were typically securitized and pooled in a Real Estate Mortgage Investment Conduit (REMIC) that would hold them in trust. Done properly this allowed them to take advantage of an IRS tax exemption. However, to avoid the county recording fees, MERS claimed to hold the mortgages and notes (technically, the mortgage and the note are separate, and it is the note that is required to foreclose -- without the note, the mortgage has been ruled by courts to be a "nullity" -- see Floyd Norris) so that they could be traded without paying the fees and filing the paperwork. In fact, the servicers held the notes. But if the servicers were holding them, how could they be in the REMIC trust? The IRS code is very strict -- the paperwork must be conveyed to the REMIC and there must be a clear paper chain of title through the securitization and sales. Without the paperwork, the securitizations may not be legal, and could subject investors to back taxes and penalties. (See Adam Levitin)

But, as always with the Wall Street onion, things are worse when we dig deeper. Almost all of the residential mortgage backed securitizations were done under New York state law -- which is even stricter than the REMIC requirements. That law wanted to make the securities as safe as possible, "bankruptcy remote" so that if the issuing banks failed, bank creditors could not come after the securitized mortgages -- to seize the notes and recover losses. This is why it was essential that the notes and mortgages be physically conveyed to the trustees. Remember that the major banks are also owners of the servicers -- so if the servicers retain the notes and the bank fails, the bank's creditors might be able to claim the notes and mortgages. So according to NY state law it is the "Pooling and Servicing Agreement" that governs the securizations. These require that the notes and mortgages are held by the REMIC trustee. Indeed, they require that the trustee check to make sure all notes are conveyed; if there are any mortgages included in the "pool" without proper paperwork, then they must be replaced by mortgages with notes. All of this is supposed to be certified by the trustee as completed -- usually within about six months. (For an excellent explanation of the details, see Yves Smith)

We now know beyond question that the notes were not typically transferred -- both MERS's own document as well as court testimony by top management of servicers make it clear that the "customary" practice was for the servicers to retain the notes. We also know that almost all securitizations were done in NY. And we know that the PSAs required transfer of the notes to the trustees -- who were required to certify that this was done. From this we can conclude that a) the trustees either did not perform the certification, or they lied, and b) the securities are no good. Probably most of them; maybe all of them. Fraudulent.

Lo and behold, the mortgages went spectacularly bad. That would mean the securities holders are stuck with losses. But only if the securitizations were legal. They were not. They failed on two accounts: the underlying mortgages did not correspond to the "representations" made to securities holders, and the notes were never endorsed and sent to the trusts. That means the holders of the trillions of dollars of securities can present them to the originating banks, demanding their money back.

The servicers are now "misplacing" all the documents, including the notes, associated with the mortgages on which they are foreclosing. The hope is that MERS and the mortgage servicing banks can get the properties, dispose of them in firesales, and pay pennies on the dollar to securities holders before they discover they've been scammed from here to Pluto. Hence it would seem the notes were not really lost, but rather are being destroyed to cover the fraud. And if this is true, MERS and the big banks are conspiring to commit foreclosure fraud as they destroy documents and create new counterfeit paper trails. The reader who pointed me to the MERS document put it this way:

When we get into the "work product" of the 'robo-signers' as seen in the sheer volume of Lost Note Affidavits, it is evident that these exist not simply because notes were "lost" but as a cover-up because the trustee and/or servicers realized early on that the notes were never properly endorsed and transferred or delivered to the trust so they "disappeared" the physical piece of paper and any allonges thereby eliminating any evidence contrary to the trust's ownership of the notes. As you wrote 'Those pesky little documents might come back to haunt them should someone later file a lawsuit.'

Yep, that is why they are shredding them and hiring Burger King kids to manufacture new ones. More fraud to cover previous fraud. Yes, this is go-to-jail fraud, but what the heck -- if you are already facing time behind bars you might as well go for broke.

I share this reader's outrage:

Reading through "MERS Recommended Foreclosure Procedures - State by State", it becomes obvious that MERS was set up to be one big steamrolling foreclosure machine. I simply cannot get over the fact that this document was created in 1999. How nicely MERS accommodates predatory servicers inflicting servicing fraud on homeowners in order that deal makers, proprietary traders and certain hedge funds could profit many times over with their rigged credit default swap bets shorting subprime. This was a very clever, interlocking scheme of complicity on the part of many involved perpetrators.

You don't have to be a conspiracy theorist to smell something rotten in Denmark about all of this. Maybe there was never any overarching plan. Maybe MERS was set up merely to defraud counties out of their mortgage registration fees. Perhaps MERS never realized that failure to transfer the notes to the trustees invalidated all the securities, while contributing to tax fraud.

If all that is true, then the destruction of documents and the creation of falsified documents by "Burger King" robo-signers was not planned back in 1999. But it is still go-to-jail fraud. And the big banks are still on the hook for hundreds of billions -- maybe trillions -- of dollars. In other words, it is still a big problem.

Where Do We Go From Here?

To recap, MERS's own documents demonstrate beyond question:

  1. The notes were never transferred, as required by Federal and NY state law, to the trustees of the REMICs;
  2. At best, the notes were retained by the mortgage servicers as directed by MERS (many never left the mortgage brokers, many of whom are now bankrupt);
  3. MERS claims to own the notes and therefore the mortgages to speed foreclosure;
  4. Actually, MERS does not hold the notes, which are held by servicers, but MERS instead "deputizes" employees of the servicers so that it can claim notes are transferred "in house" to avoid paying recording fees as well as avoiding maintenance of clear chains of title;
  5. On foreclosure, the documents are "disappeared" because they demonstrate the notes were never endorsed and transferred as required by law, with MERS and the servicers filing "lost note affidavits" to dupe the judges into allowing illegal foreclosures to proceed and to dupe securities holders so that they do not demand restitution;
  6. Servicers ensure homeowners default, as they "lose" mortgage payments, credit them to the wrong accounts, or helpfully recommend to homeowners that they stop making payments--all of this is to speed foreclosure to ensure securities holders do not realize they have been duped as they are paid pennies on the dollar for toxic securities;
  7. This also ensures that the investment banks that originated the toxic securities win their credit default swap bets they placed against the homeowners, with favored hedge fund managers like Paulson also winning CDO bets on failures;
  8. The faster the foreclosures can be processed through manufacture of fraudulent documents by Robo-signers, the lower the chance that MERS and all of its clients will be brought to justice.

There is a community of interests that can bring together the securities holders (including PIMCO and the NYFed) and the defrauded homeowners to stop the illegal foreclosures. The best thing for the investors is to demonstrate that the securities are fraudulent because the underlying mortgages did not meet the representations and because the notes were not legally transferred. The best thing for the homeowners is to demonstrate that because the notes were not legally transferred, no one has standing to foreclose. While they might still owe money on their mortgages, no one can take their homes away from them. That provides the proper incentive to force banks to modify the mortgages.

Further, and somewhat ironically, leaving homeowners in their homes is best for the banksters at the level of the economy as a whole. Since the securities investors will be able to force the banksters to take back the securities, the loss minimizing solution for banks is to stop the foreclosures that are depressing real estate prices. That can then buy time to modify the mortgages to ensure homeowners can stay in the homes and service their debt. Instead, the banks are pushing for Congress to retroactively legalize the frauds they perpetrated against counties, borrowers, and investors. As always, Wall Street wants someone else to pay for its crimes -- and is willing to destroy the property rights that are fundamental to a system based on private property in order to protect CEO compensation on Wall Street.

Here is the alternative solution President Obama needs to consider.

  • An immediate moratorium on foreclosures of any mortgages that are, or ever were, registered at MERS;
  • Declare all outstanding fraudulent securities null and void, require securitizing banks to make restitution to investors, and sue the banks for restitution of the back taxes owed by REMICs;
  • If this makes the banks insolvent, begin to resolve them, shutting them down;
  • Prohibit Fannie and Freddie and any chartered bank from dealing with MERS, which is an organization formed to perpetrate fraud;
  • Investigate MERS for fraudulent activity, require restitution of all county recording fees that were evaded, and punish the guilty;
  • Formulate a policy to help homeowners who have been victims of lender fraud, with a goal of reducing mortgage payments to something they can afford; and
  • Let Congress know he will veto any legislation that legalizes the fraud perpetrated by MERS, by mortgage servicers, and by originating and securitizing banks.

These actions will help to restore the rule of law, while punishing the guilty. And stopping (illegal) foreclosures will reduce the pressure on real estate prices. By itself this will not put the US on the road to recovery, but it is certainly a step in the right direction.

In the final part of this series I will conclude with an assessment of the role that self-supervision by Wall Street played -- and continues to play -- in propagating this crisis, with MERS as the prime example of the folly of the delusion that the interests of banksters coincide in any manner with the public interest.

In the previous two parts of this series I have recounted the multiple frauds perpetrated by MERS: it defrauded counties out of billions of dollars of reporting fees, it defrauded homeowners by destroying documents that provide a clear chain of title -- facilitating its foreclosure frauds, and it defrauded securities investors by failing to adhere to PSAs (pooling and servicing agreements) -- making their securities invalid. Now, in order to cover the trail of deceit MERS and the banks are stealing homes as fast as they can in the hope that no one will notice the fraud. Meanwhile, they are destroying real estate values and adding to the headwinds that are pushing our economy into the first great depression of the 21st century.

In this piece, let us step back and examine the big picture to answer the question: Why did Wall Street create this crisis? For the answer, we have got to go back several decades. I do not want to give a long-winded history lesson, but it is necessary to understand the transformation that has taken place since the 1960s. Back then, the financial system was small, simple, regulated and relatively unimportant. Banks made commercial loans; thrifts made home loans; and Wall Street handled investment finance. Households had jobs and rising wages so they didn't need to go into debt to finance rising consumption. With robust economic growth, each generation could expect to have roughly twice the living standard of the previous generation.

Things began to change in the 1970s, and especially in the 1980s as growth slowed, as median real wages stopped rising, and as financial institutions were unleashed to expand activities into new areas. At first households coped with stagnant incomes by putting more family members to work (especially women), but gradually they began to rely on debt. Banks created new kinds of credit and gradually expanded their views as to who is creditworthy. I can still remember one conference I attended at which someone from the financial sector proudly announced that the banks had discovered an untapped market for credit cards -- the "mentally retarded". The argument was that this group would be just as safe as college students, since parents would bail them out in order to avoid having their kids' credit ratings suffer. This was not a joke -- it was a business model.

With slower economic growth, it had become harder for American firms to make profits. They shifted their focus from actually producing goods and services to making money on financial products. GM and GE became primarily financial institutions that happened to make cars and light bulbs as a sideline business. Yes, you could buy a car made by GM, but the company made most of its profits on the auto loan. (It then branched out to -- you betcha -- mortgage backed securities and all other manner of risky assets. I hope readers understand that that is what the "auto" bail-out was all about.) As everyone got into the act of indiscriminate lending, banks found their own business dwindling -- so they had to continually innovate with new products and to find new activities to finance.

The economy became "financialized", as financial institutions inserted their activities into virtually every aspect of American life. Health care morphed into financialized health "insurance", given a huge boost by "Obamacare" legislation that for the first time in US history mandates that Americans turn their incomes over to private financial firms. Even death became financialized with "peasant insurance" (employers take out contracts on employees) and "death settlements" (life insurance policies on those with fatal illnesses are securitized and sold to gamblers betting on early death). Retailers increased the financialization of consumer goods -- they couldn't get enough profit on the sales or even on the consumer credit, so they offered "extended protection" on everything from TVs to toasters and then tried to scare customers with an unusual marketing pitch: the products they carry are so shoddily produced that insurance is necessary to protect the purchase.

Every kind of debt or insurance product became a financial commodity, packaged into a security and sliced and diced and bought and sold. At the same time, "insurance" (often in the form of credit default swaps) replaced underwriting (credit assessment) to make these loans more marketable. And then the credit default swap insurance, itself, became a way to bet on the death of securities, companies, and even nations. It is not a stretch to say that Wall Street's capitalists returned to their roots as "undertakers" (the old term for entrepreneurs), with death becoming their main line of business.

Debt grew. In 2007 just before the crisis hit, total US debt reached five times national income -- the previous record was just three times income, a level reached in the propitious year of 1929. In other words, each dollar of income had to service five dollars of debt. In the decade previous to the crisis, American households spent more than their incomes in almost every year. For every debtor created there is a creditor. Not surprisingly, creditors are richer than debtors. Over time, the proportion of Americans who were debtors grew, and the proportion of creditors fell. The rich got richer and every one else either got poorer or at best just managed to break even. In other words, the debt train fueled a massive redistribution of income and wealth to the very top. It is no coincidence that inequality in the US has returned to its previous peak -- reached, not coincidentally also in 1929. That is what President Bush actually meant when he talked about the ownership society -- a society in which a small elite would own everything.

Banks became giant one-stop casinos that facilitated every kind of crazy bet. They would make a loan to you, but then simultaneously securitize it to sell-on to an investor plus place a bet that you would default on your loan so that the security would go bad. For a fee, they'd let a hedge fund manager choose the riskiest loans to bundle into a sure-to-fail financial product that they would then sell to their own customers. And then they'd join the hedge fund in betting against their customers. The more loans they made, the more fees they collected; the more bad loans they made, the more bets they would win. The more debt they piled on households, the greater their profits; riskier debt meant even higher fees and more defaults and thus greater wins from gambling. Prospective death was a booming good business for our undertakers.

America became "Bubbleonia" -- with a "bubblicious" economy that moved from one bubble and crash to another: A commercial real estate bubble and crash in the 1980s that killed the thrifts; a series of developing country debt bubbles and crashes in the 1980s and 1990s fueled in part by American banks; a US stock market bubble and crash in 1987; the dot-com bubble and crash at the end of the 1990s; and then the US real estate and global commodities markets bubbles and crashes this decade.

Increasingly, the bubbles were managed cooperatively by Wall Street and Washington. Chairman Greenspan and President Clinton made a pact with Robert Rubin's Wall Street to pump up "new economy" internet stocks through "irrational exuberance". When that failed, Greenspan extolled the benefits of adjustable rate mortgages, while President Bush hawked the "ownership society". Wall Street turned America's residential real estate sector into the world's biggest casino -- $20 trillion worth of property that could serve as the basis for many tens of trillions of dollars of bets. Bernanke promoted the bubble by assuring markets that America was enjoying the "great moderation" -- a new era in which stability dominates -- and that in any case, the Fed would protect markets in the case of any hiccups.

The home finance food chain was fundamentally changed to facilitate the rapid pace of gambling that would be necessary to feed Wall Street's appetite. Real estate appraisers were paid more to over-value homes; mortgage brokers were rewarded with higher fees to induce borrowers to accept unfavorable terms; mortgage lenders got better fees for riskier loans; securitizers wanted more junky loans to increase the projected returns spit out by their own internal models that presume more risk is always rewarded with higher profits; credit raters got paid to rate trash as AAA -- as safe as treasuries; and investors shunned "plain vanilla" securities in favor of risky structured products that were so complex no one could understand them -- so that they could have any value desired. No worries, AIG sold "insurance" on all this garbage!

That homeowners would default on the unaffordable mortgages was a foregone conclusion. Indeed, it was the desired result of the business model. The preferred marketed loans tell it all: Subprimes! NINJAs! Liar's loans! Washington helpfully changed bankruptcy law to make it more difficult for a homeowner to get out of mortgage debt in preparation for the wave of defaults that everyone knew would result. Wall Street would get the homes, and homeowners would still have to pay on the debts. Then the foreclosed property would be resold, with more fees for everyone in the finance food chain, and the whole process through to default would begin again -- a nice virtuous cycle.

It might seem strange that banks would actually want default. But that is the beauty of a casino -- the house always wins, and homebuyers were gambling against the casino. On the way up, fees are collected, and on the way down fees are still collected on the foreclosures and as houses are resold. And if anything should go wrong, Washington backstops the casinos.

But it was necessary to streamline foreclosure to make it as fast and cheap as possible. Enter MERS -- another link in the food chain -- created by the banks in 1997 in preparation for the boom and bust. MERS was set up to be a foreclosure mill. It would break the centuries-old custom that protected property rights by requiring every sale of property to be publicly recorded, and requiring that any creditor claiming a right to foreclose to demonstrate clear title, with an endorsed note in the creditor's name and a record at the county office showing transfer of the property.

The banksters did not want to go through all that paperwork, and needed to subvert the transparency that would shine light on their crimes. Hence, they set up a fraudulent shell corporation that claimed to be the mortgagee; while the original sale would be recorded at the county office, subsequent sales and purchases of the mortgage would be recorded only by an "electronic handshake" between two "members" of MERS. Even that record was considered by the banksters to be purely voluntary -- MERS did not require members to actually record transactions. If they found it more convenient to conceal the transfers, that was permitted.

MERS even farmed out its name -- for 25 bucks anyone could buy the MERS trademark and use it. And in a touching display of fraternity, everyone got to be a certified vice president of MERS. (Sort of like those 1950s marketing campaigns advertised on cereal boxes -- for 25 cents, you too can be a Super Fraudster with a nifty membership ring and all the benefits of membership in an international criminal conspiracy!)

MERS deliberately undermined the legality of the loans and the records. Homeowners could no longer search the public records to find out who actually held their mortgage -- the record would show MERS as owner, but MERS was a shell corporation with no real employees. It was not a servicer, so the homeowner could not make mortgage payments to the purported owner. As a result, checks were sent to the wrong servicers; servicers credited the wrong accounts; servicers claimed delinquencies on homeowners who never missed a payment, and piled late fees and delinquencies on the wrong borrowers; sheriffs were sent to break down the doors of the wrong houses, and threw belongings out on the street in front of homes on which there was no mortgage at all. MERS purposely created the mess, at the behest of banksters who do not want mere legal technicalities to get in the way of stealing homes. The undermining of the public records was not a mistake -- it was MERS's business model, created by the member banks.

And MERS helped banksters to defraud securities holders. Banks not only separated the mortgages from the notes, but they even destroyed the notes as they entered the mortgages into MERS's electronic data base. MERS told servicers that it is "customary" practice to retain notes, not to endorse them over to REMIC trustees as required both by federal tax law and by the PSAs that govern the trusts. This made the securities a "nullity" -- as the Supreme Court ruled over a hundred years ago -- because a mortgage without a note is unenforceable in foreclosure. At best, the securities are unsecured debt, with no real property behind them.

In any case, the mortgages put into the trusts did not meet the representations made to investors -- so even if the notes had been properly endorsed over to the trusts, the securities could be turned back to the banks. By creating a completely fraudulent electronic registry system -- in which data would be entered only if banks found it convenient to do so, and in which data could be modified at any time by any member of MERS -- MERS made it easy to conceal the securities frauds. Destruction or forgery of the paperwork was absolutely necessary to cover the trail of fraud from origination of the mortgage to securitization and finally to the inevitable foreclosure. Again, destruction of documents was not a mistake. It was the business model.

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+18 # B. 2010-12-16 23:09
If Mr. Wray is correct, and I understand this mess (and I'm not sure I do), The states Att. Gen's. had better pick up the pace on investigations and law suits/criminal charges before washington legalizes this fraud. We all know DC (including Obama), is not going to let the morgage company's take a hit. Nevermind states, county's and cities lost billions in transfer fees and taxes. It also seems to me the Dept.of Un-Justice would be filing fraud charges against whomever invented MERS (sorry I keep flashing back to the days when we still had a just society).
 
 
+11 # Alturn 2010-12-17 00:05
The corrupt old illusion keeps on being exposed yet we still do not mobilize. The financial system is rotten to the core yet we still cling to it. When will we even consider a new path where the financial system no longer controls our decision making?

"It is not only large financial institutions which are tumbling into bankruptcy, the whole world is becoming bankrupt — mentally and spiritually, said Maitreya’s associate. The world is going through a huge crisis and all the medicines have been tried and failed. Maitreya says that the tumour has got to burst open before the healing can begin, he said.
The world is in such a chaotic state that it could happen at any time. The politicians and the generals can do nothing to stop it — everything they have tried to avert disaster has failed."
- World Teacher Maitreya through an associate June 1992 Share International magazine
 
 
-15 # lee nason 2010-12-17 06:39
Mr. Wray is correct but the required legal technicalities of processing real estate titles, requirements which are hundreds of years old and at odds with our digital age, are the source of the problem.

Since the homeowners being foreclosed upon seem uniformly to be in arrears on their mortgage payments, the foreclosures are moral and socially appropriate. If the foreclosures did not proceed, whole neighborhoods of housing in deliquency would collapse into decrepitude since the errant mortgagees would not be maintaining their property as well as their more financially viable neighbors. This would harm the economically responsible to benefit those who got in hock over their heads. While the situation is to be deplored, attacking electronic real estate accounting is not a relevant answer to the problem. Attacking the enablers, Fannie and Freddie, and updating our real estate title transfer law would be a much more fruitful way to proceed.

Lee Nason
New Bedford, Massachusetts
 
 
+12 # Amy Pemberton 2010-12-17 11:29
Uh, no. This is not simply a matter of the laws being behind the times. If the laws are behind the times you change the laws in a way that protects the property owners. This is attempting to use modern technology to engage in fraud. As Mr Wray reports technology was being used to intentional confuse the chain of title--who actually holds the mortgage--to defraud both the borrowers and the government. The fact that this fraud might also make it hard to go after the lenders who are delinquent is unfortunate, but that does not excuse ignoring the law just because the lenders through their actions have muddied the waters so much that they cannot easily establish that they have the right to foreclose. No note, no foreclosure. Period. Sorry, but at this point the issue is lenders' irresponsibilit y/criminality, not borrowers'.
 
 
+7 # AndreM5 2010-12-17 11:58
I challenge you to certify who owns your note.
 
 
+11 # gentry cooper 2010-12-17 14:02
you know nason, the english language does not have the capacity to describe the utter contempt that i have for people who feel the way you do. after all that is known about the criminal activities and fraud committed by the banks in the foreclosure crisis you are still not willing to hold the banks accountable and instead are blaming the victims (home owners). what an incredibly STUPID post by you.
 
 
0 # Ken Hall 2010-12-23 02:40
The weight of responsibility rests upon the lenders, who knowingly, it seems, circumvented civic and state laws in order to maximize profit by avoiding transfer taxes. Chicanery should not be rewarded.
 
 
+14 # Diane 2010-12-17 06:40
Everyone with a mortgage should be up in arms.And all of these should be writing their congressmen and state attorney generals about this.Loud voices and large numbers still get an audience.
 
 
+1 # Dudu 2010-12-17 14:22
Best I understand it, MERS concept is legally sound. Problem is the MERS member/"officer " currently on electronic record as the physical holder of the original promissory note, may no longer have it. The note "endorsed in blank" (or blank endorsed, means same thing) is like a personal check with amount and date filled in and signed, but payee left blank or filled in with "cash". The current check holder/bearer may either endorse the back and cash the check in, or pass (assign) the check to someone else. Now imagine he electronically assigns the check/note to MERS. The note is then virtually passed from hand to hand amongst members of MERS. Postal transfer of the note is much slower than electronic transfer, if that occurs. If the physical note is lost, then the obvious temptation is to forge a new note, sign and back-date it. Otherwise, you return to original loan applicant with hat-in-hand and beg him to give you a new note. The original loan applicant can be long gone, hiding from other creditors.
 
 
+5 # Dudu 2010-12-17 14:57
"No note, no foreclosure. Period. Sorry, but at this point the issue is lenders' irresponsibilit y/criminality, not borrowers'." -Amy Pemberton

I agree. Forging a new note is fraud. Either go back to the original issuer of the note for a new note, or write it off as a bad debt. Too bad if the original home owner is long gone, even hiding from creditors. Perhaps the State or County can take possession as abandoned property.
 
 
-1 # Patricia Chang 2010-12-18 01:29
Obama and his henchmen will never prosecute these crooks; because he is joined at the hip with them. I suspect it goes all the way back to his days in Chicago. Rahm Emmanuel was always in tight with the Wall Street gangs.Obama pulled a fast one on us with his fancy rhetoric and the use of emotionally-cha rged words like Hope, Change, Believe. He is a snake oil salesman, like the vast majority of politicians. Bush couldnt get it out of his mouth correctly, but it goes: "If you fool me once, shame on you. If you fool me twice, shame on me." I do NOT intend to be fooled twice.
 
 
+2 # Scott A. Weir, Ph.D. 2010-12-19 20:58
Can you believe this guy is what Dean Baker calls a "card-carrying economist"? He is, and head and shoulders above Baker, one of a relative few honest practitioners of that pseudo-science. I am one myself, as honest as Professor Wray but not nearly as knowledgeable. Pay attention to this man: He knows what he is talking about.

Lee Nason and Dudu: Who is paying you to defend the banksters? Or are you economists, of the "main stream" that is rushing headlong over Niagara?
 

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