I am a real estate attorney in New York. In the mid-nineteen nineties, I was asked by a loan servicing company to foreclose a loan in the name of a certain bank. After receiving the foreclosure title search, I informed the servicing company that according to public records, the bank did not own the loan, and unless they could provide the necessary assignments for recording, I could not foreclose the loan in the bank's name. They provided their assignment to our offices, but their was still a gap in the chain of ownership, because the bank that had assigned the loan to the foreclosing bank in question was not the last owner of record in the foreclosure search either. I had to wait several weeks, after which I finally received the missing chain of assignments for recording. I asked the servicing company why no one had bothered to record the assignments, and he said this was common practice, because they wanted to refrain from paying the recording fees to record their assignments, and the powers of attorney appointing the servicing agent as attorney-in-fact, as long as possible, as the assignments were not needed until a loan defaulted. I felt uneasy with the whole procedure and decided to get an estoppel letter from the bank doing the foreclosure, stating that they had not further assigned the mortgage to anyone else, that they had paid full consideration for the mortgage they bought, and that they had legal standing to foreclose the mortgage. The bank also gave me a power of attorney naming the servicing company as attorney-in-fact to foreclose the loan on their behalf, which I also recorded.
So here you have a servicing company collecting payments based on the fact that they originated the mortgage (which is usually the case) and were the owners of record (being the original lender in the recorded mortgage). Therefore, no one would question the mortgage servicing agent's legal right to payments even though the mortgage had been assigned many times. I also supposed that when title to a mortgage had been assigned, the new bank would send a letter to the customer informing them of the assignment, and asking them to keep sending their payments to the same servicing company (which was still the owner of record), but was not sure if this was the procedure that was used. If no letter was sent, then frankly no one checks the county clerk's office to see who owns their loan of record before making a payment and would continue paying the original servicing company. And if such a letter was sent, is a mere letter from the new owner enough to give either the original, or a new, servicing company authority to receive payments, in light of the fact that the new owner has not recorded its assignment? If the servicing company were made an attorney-in-fact to receive payment for the new owner of the mortgage, and the assignment and power of attorney were recorded, that would resolve the problem, but now the new bank has to pay to record both the assignment and the power of attorney. When you are talking about thousands or even millions of loans, that quickly adds up.
I have thought about this for some time and this manner of doing things leaves open the possibility of much fraud that could be committed by the servicing company, or any assignee of the servicing company, where the banks refuse to record their assignments until a loan goes into foreclosure. I believe that certain large servicing agents in particular have been selling the same mortgage multiple times to different banks. They can do this because in many cases they keep the original assignments in escrow for the bank they have sold the mortgage to or they know that the bank does not record its assignments. I also believe that they act in collusion with one another and keep two sets of books, buying loans from one another that have already been sold one or more times before. They treat the first bank as the original owner and send the payments received from the borrower to that bank. The other banks also receive payments, but it comes from the servicing company out of the money it received as payment for their fraudulent sale of the mortgage. The money received from these fraudulent sales is used to gamble, being invested in assets with a return higher than the rate of return in the mortgage. For instance, if a mortgage was paying a fixed rate of 5%, and a servicing company takes the proceeds from the fraudulent sale of that mortgage and puts them in junk bonds paying 10%, they keep the spread. They could also gamble using interest rate swaps. For instance, they could convert a mortgage with a fixed rate of return into a variable rate via interest rate swaps if they thought rates will rise. Most of these companies get inside information from the Fed, so their rarely bet wrong. This could explain the parabolic growth of the interest rate swaps on the derivative markets. This fraudulent multiple selling of mortgages enables them to compound their leverage. Many are operating on 2.5% reserve, allowing them to lend 40 times deposits. But if they now sell the same loan twice, their leverage is doubled to 80 times deposits. I believe that if regulators start to really dig into this, that all this fraud will be brought to light. That would add fuel to the fire of the ongoing mortgage-gate.
With respect to the Mortgage Electronic Registration System (MERS), it is my opinion that it is illegal in New York and violates both foreclosure laws and recording laws.
First of all, who is MERS to make itself into a county clerk. People, including lawyers and courts, are dependent on records being kept by disinterested public officials charged with the duty of keeping accurate records on who owns properties and who owns mortgages, not by some private entity created by a bank lobby with all kinds of conflicts of interest.
Second, the MERS can only conduct a mortgage foreclosure in its own name when a mortgage lender has transferred the note and mortgage to MERS by assignment (both the note and mortgage are almost always transferred together in the assignment), and MERS has paid for the loan and taken possession of the note and mortgage, and has not further assigned the mortgage. If MERS has not paid for the assigned mortgage, or having paid for the note and mortgage, it has further assigned the mortgage for value, it has no standing to sue in its own name, and can only act as an attorney-in-fact if a recorded document gives them that right. Further, when acting as an attorney-in-fact, they must name the parties in ownership which ownership must be established via properly recorded assignments filed with the county clerk, and not by the privately created electronic records kept by the MERS. Where there are multiple owners, the attorney-in-fact must also show how much of an interest in the mortgage is owned by each party, and further that the owners together own 100% of the mortgage.
Presumably, some mortgages have a power of attorney from the lender to MERS built into them, and since the mortgage is signed by both the borrower and the lender, and is notarized and recorded, that could suffice. The same could presumably be done in the assignment to the MERS. However, some county clerks might insist on a separate power of attorney rather than allowing two different types of documents to be combined into one document, stating that the documents were combined to avoid additional recording fees.
If the original lender has assigned the mortgage to the MERS for no consideration, and then transfers the mortgage to another bank via the MERS system for value, then the MERS has no standing to sue without a recorded power of attorney from all parties having an ownership interest in the loan, and the owners must all record their interests with the county clerk before MERS can act as an attorney-in-fact to foreclose the loan. So therein lies the rub, because no one can figure out who really owns the loan after it has been sliced and diced into the tranches of several securitized derivatives such as MBS's and CDO's. Often also, the original note and mortgage have been lost in the shuffle, and locating duplicates kept by the closing law firm can be a pain to track down. Note that In New York, a certified copy of a mortgage from the county clerk is as good as an original for court purposes. The notes and assignments are the real problem.
To illustrate this more fully, I provide a simple example to demonstrate how you determine who has the right to foreclose a mortgage loan in New York. Let's say that Bank A makes a mortgage loan to Mr. Smith. Bank A then records the mortgage, and immediately assigns the mortgage to Bank B, which, for payment of full value, receives the original note and mortgage along with the assignment from Bank A. But Bank B does not record its assignment. Mr. Smith now defaults. Who can foreclose the loan? The answer is neither. Bank A has sold the loan for full value, and cannot collect on it twice, as that would be fraud. Bank B really owns the mortgage, but because it has not recorded its assignment, it cannot establish its ownership of the mortgage via the public records in a court of law. Bank B must first record its mortgage assignment before it can foreclose, and must produce, if demanded by a party in interest, the original note and mortgage. If the original note and mortgage are missing, Bank B can move the court to impose an equitable mortgage if it can prove that both Bank A and Bank B gave value for the making of the mortgage, and for the assignment of the mortgage, respectively. Based on this example, I think you can see why the MERS, and the owners and securitizers of MBS's and CDO's, are all in big trouble.
Finally, MERS allows for all types of fraud and conflicts of interest. What if hackers got into the system, and wreaked havoc with the records? What if owners of the MERS (i.e. the bankster-gangsters) used their privileged status and influence to alter records in the MERS anytime they had a documentation problem or wanted to commit outright fraud? I have already read about claims that in states that use deeds of trust and non-judicial foreclosures, false parallel mortgages are being created, treating the borrower as if the borrower has taken out two identical loans. Obviously, only one of these loans gets paid, and the other goes into default. The bank then forecloses on the false loan, and the borrower is not even notified and has no idea that this has happened. And how can anyone determine who owns their loan, and therefore who they should be sending their payments to, if the only record of the assignment of mortgage is kept by the MERS? So as you can see, the MERS is just another scam to aid and abet the bankster-gangsters in their ongoing rip-off of the public. It totally bypasses the protection that the recording statutes provide for the public, and makes the foreclosure process into a public nightmare.
Other Comments
In Foreclosuregate the federal government is trying to cover up the damage and put it off until after the election. The states’ attorney generals’ have different ideas. Even if mortgages were traded electronically the law demands that there be a paper trail. The initial events in this discovery process has already unveiled that banks used the same mortgages to fill different loan packages. They were sold multiple times, which, of course, is fraud. Furthermore the MERS system is unlawful. As a result Bank of America has demanded the FDIC pay them for faulty or bad mortgages. Evidently the practice of multiple mortgage use was widespread. The entire system is rife with fraud, due to lack of lawful, proper, legal documentation. That had led banks to arrange mortgages to totally unqualified borrowers just to be able to securitize and sell those AAA rated mortgages. The banks made major amounts of money and the Federal Reserve arranged for the taxpayer to pay the bill. The banks carried fractional banking to a new level in their deliberate fraud. In fact, there is even the possibility that the mortgages were never really securitized. There probably never was any paper work and what there was perpetuated fraud. In addition there is also the possibility that LPS, a foreclosure-outsourcing firm, fabricated documents and committed forgery as well.
Bankers made outsized profits via fraud. The question now is, who is going to jail? Government will jail the little guys as always and the big fish will swim away. Let’s hope this time it is different.
Even the NY Fed wants to financially pursue Bank of America and Fannie Mae and Freddie Mac want to pursue Wells Fargo for burying them with toxic waste known as CDOs, ABS and MBS. If many mortgages are forced back to the creators, that will force the banks into insolvency or another public bailout, we will call TARP2. This kind of action will send the public into spasms and it could lead to major demonstrations. They are sick and tired of the financial world being bailed out and the public getting nothing.
This scandal comes as residential and commercial real estte keeps falling in value, putting many more banks on the edge of failure. That is borne out by Gary Shilling who believes housing prices will fall another 20% and the number of underwater mortgages will increase from 23% to 40%, or that half of Americans will deliberately default. We, as has Mr. Shilling, been uninvited guests predicting a major fall in housing since June of 2005.
The propaganda, lies and disinformation the American public has been subjected to, is without precedent and they are finally listening. Wall Street, banking, insurance and their government are the enemy. The amount of disinformation being presented to the average American goes on 24/7, never ceasing in magnitude by a totally controlled major media. If it wasn’t for talk radio and the Internet the public would already be enslaved totally. Needless to say, today in Orwellian fashion people such as us are treated as terrorists, because we deal in the truth and government does not like that, because it exposes them for what they are, criminals. In the end the truth will win out and they will pay for their crimes.
More Comments
Finally, the above-described Real Property, Trust and Estate Law Journal article also comments on the illegality of MERS (the indented quotes are from the article; the rest is Denninger's commentary):
Worse, MERS may have literally "split the baby" and rendered millions of mortgages unsecured:
Typically, the same person holds both the note and the deed of trust. In the event that the note and the deed of trust are split, the note, as a practical matter becomes unsecured. Restatement (Third) of Property (Mortgages) § 5.4. Comment. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Id. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. Id. The mortgage loan became ineffectual when the note holder did not also hold the deed of trust.
That's an actual holding of the Missouri Court of Appeals.
It gets worse.
If the growing line of cases asserting that MERS is neither a mortgagee nor a deed of trust beneficiary is correct, then courts must soon confront profound questions about the very enforceability of MERS’ security agreements. ... There is a compelling legal argument that loans originated through the MERS system fail to create enforceable liens.
The mortgage industry has premised its proxy recording strategy on this separation despite the U.S. Supreme Court’s holding that “the note and the mortgage are inseparable.” If today’s courts take the Carpenter decision at its word, then what do we make of a document purporting to create a mortgage entirely independent of an obligation to pay? If the Supreme court is right that a “mortgage can have no separate existence” from a promissory note, then a security agreement that purports to grant a mortgage independent of the promissory note attempts to convey something that cannot exist.