Testimony Before Sub Committee lays the story out short and sweet — TAX EVASION, LIABILITY SHELL GAME

It’s happening…. the word is spreading. Read this carefully. It has lots of good quotes for you to use. But the narrative on who owns the loan is wrong — the investor purchases a bond and a share of the loans. The  SPV “Trust” owns nothing.  It is a REMIC conduit which means there are no tax events under the Internal Revenue Code because it is under the statute a completely transparent nearly non-existent entity. MERS Tax Evasion Scheme- Testimony before Senate Banking Committee 2007

As thinly capitalized originators make more and more loans, claims against the lender accumulate, while the lender’s assets do not.  The lending entities are used like a disposable filter: absorbing and deflecting origination claims and defenses until those claims and defenses render the business structure unusable.

As Professor Eggert has explained, this “churning” of capital “allows even an institution without a great amount of fixed capital to make a huge amount of loans, lending in a year much more money than it has.”

Other things being equal, the larger the loan, the higher the commissions, closing costs, and sale proceeds that a broker or originator earns. These simple facts create strong short term incentive for brokers and originators to cut corners in the underwriting process—creating a dangerous and sometimes fraudulent disparity between company policies and company practices. It also creates an incentive for brokers and originators to encourage consumers to borrow more money than they can afford. Moreover, brokers and originators in the current system have an incentive to put tremendous pressure on appraisers to appraise home values higher and higher in order to facilitate ill-advised loans.

Policy makers must come to terms with the notion that contemporary predatory mortgage lending is an economic artifice with two classes of casualties: consumers and investors.  For this reason, proposals which create unlimited assignee liability may go too far by forcing relatively innocent investors to bear the brunt of large punitive damage awards.

Predatory lending strategists can use their advantage in managing litigation costs to hide from judicial scrutiny within large structured finance deals.  Higher dispute resolution costs associated with securitization significantly corrode the substantive consumer protection rights cast by our existing law. The result has been that consumers have little or no competent legal advice on how to deal with unfair, unethical, and illegal treatment in the mortgage subprime lending industry. With no watchdogs on the beat, even well-meaning companies have gradually began to grow more, and more comfortable with questionable behavior simply to remain competitive.

In traditional two and three-party mortgage markets, consumers and their counsel had a clearer
idea of whom they were borrowing from and who might seek to foreclose upon them if they failed to repay.  Service of process, interrogatories, depositions, and negotiations could be expected to involve only one company which was responsible for all, or nearly all, the relationship functions associated with the loan.  In comparison, selling a loan into a contemporary structured finance conduit can force consumers to communicate with and litigate against many more business entities.  Even simple litigation tasks, such as service of process and requests for production of documents, are much more complicated in structured finance.

The parties obtain two principal benefits from attempting to use MERS as a “mortgagee of record in nominee capacity.”  First, under state secured credit laws, when a mortgage is assigned, the assignee must record the assignment with the county recording office, or risk losing priority vis-à-vis other creditors, buyers, or lienors.  Most counties charge a fee to record the assignment, and use these fees to cover the cost of maintaining the real property records.  Some counties also use recording fees to fund their court systems, legal aid organizations, or schools.  In this respect, MERS’ role in acting as a mortgagee of record in nominee capacity is simply a tax evasion tool.  By paying MERS a fee, the parties to a securitization lower their operating costs.  The second advantage MERS offers its customers comes later when homeowners fall behind on their monthly payments.  In addition to its document custodial role, and its tax evasive role, MERS also frequently attempts to bring home foreclosure proceedings in its own name.

While no one wishes to return to the two-party mortgage market where consumers had little access to home loans, the current system of lawless illusory underwriting is not satisfactory either.

The full weight of judicial sanctions against predatory commercial behavior should be born by the businesses and individuals that abet, conspire, or co-venture that behavior.

2 Responses

  1. I’m confused. I thought experts knew there are no real loans, only converted promissory notes?.. hmmm

  2. this is interesting, but a little over my head still, anyone care to break it down for us slow guys.

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