IT’S MAINSTREAM NOW — MORTGAGES CAN BE UNSECURED

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

“The worst outcome would be a conclusion that errors by financial institutions had decoupled the payment promises made by borrowers from the mortgages they signed. In that case, the mortgages would be invalid. Homes could be sold without paying off lenders. There also could be heavy tax consequences for lenders, both in terms of federal income taxes and in payment of back fees for mortgage registrations to local governments across the country.”

United States District Court Judge Garr M. King said that under Oregon law, the borrower was likely to prevail on the argument that the use of MERS had invalidated the mortgage.”

Mr. Peterson argues that local governments might prevail if they sue, claiming that the basic operating structure of MERS involved the filing of false documents. In that case, they might be entitled to collect several mortgage recording fees per mortgage — money that presumably would also come out of the securitization trust.”

EDITOR’S NOTE: For the first time, the FACT that there is an issue — a legal issue as to whether the loans are secured — is now in the mainstream media. It is my opinion and the opinions of dozens of other lawyers and Judges, as well as title examiners whose only work is thinking about these things, that the end result in Court will be that the obligations are “decoupled” (split in legal circles) from the notes that did NOT set forth the terms and parties of the transaction and that the obligation and note have been decoupled from the mortgage or deed of trust. In fact, it is my opinion that this was true the moment that the transaction closed. When it was recorded in the county records, a cloud on title was immediately created because the named beneficiary of the security instrument was not owed any money.

October 18, 2010

Some Sand in the Gears of Securitizing

By FLOYD NORRIS

Was the great securitization machine that made hundreds of billions of dollars in mortgage loans based on a legal foundation of sand?

That possibility, raised by two law school professors, has begun to scare many jittery investors, causing bank stocks to plummet, although they recovered a little Monday.

If they are correct, the best outcome for lenders would be a prolonged delay in completing foreclosures, raising costs still further and paralyzing an already depressed housing market.

The worst outcome would be a conclusion that errors by financial institutions had decoupled the payment promises made by borrowers from the mortgages they signed. In that case, the mortgages would be invalid. Homes could be sold without paying off lenders. There also could be heavy tax consequences for lenders, both in terms of federal income taxes and in payment of back fees for mortgage registrations to local governments across the country.

The arguments involve MERS, the Mortgage Electronic Registration Systems, which was created to smooth the securitization process and, in the process, to allow lenders to avoid paying registration fees to counties each time the mortgage changed hands.

Several state supreme courts have chipped away at MERS. But none has gone nearly as far as the professors, Christopher L. Peterson of the University of Utah and Adam Levitin of Georgetown, say is possible.

Nonetheless, some investors are growing worried. Bank stocks fell sharply last week, even while most shares were rising. JPMorgan Chase, which is a part owner of MERS, said it had not used the service since 2008. At least one title insurance company has gotten a bank to agree to indemnify it if the securitization process causes problems for titles. Without title insurance, the real estate market would grind to a halt.

And earlier this month a federal judge in Oregon issued an injunction blocking Bank of America from foreclosing on a borrower’s home. United States District Court Judge Garr M. King said that under Oregon law, the borrower was likely to prevail on the argument that the use of MERS had invalidated the mortgage.

Last week the American Securitization Forum, a trade group representing companies involved in the securitization industry, said it believed the securitization process was legal, and that its lawyers were preparing a refutation of arguments to the contrary.

There is no question that MERS has been a success in terms of gaining market share. About 60 percent of mortgages in this country show up in local records as being owned by the service. In fact, none are owned by MERS. It was created to act as an agent for others, whether banks or securitization trusts, which own the actual mortgages.

Mr. Peterson, in a paper with the dry title of “Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory,” argues that MERS cannot have it both ways, and that it faces problems if it is deemed to be only one of them.

If it is an agent, he wrote, “it is extremely unclear that it has the right to list itself as a mortgagee,” as it does. State real estate laws, he said, “do not have provisions authorizing financial institutions to use the name of a shell company,” in large part because “the point of these statutes is to provide a transparent, reliable record of actual — as opposed to nominal — land ownership.”

If it is a mortgagee, Mr. Peterson added, it has the right to record mortgages in its own name, as it did. But since it does not own the actual loan, doing that could be seen as violating a long line of precedents that bar separating a mortgage from the underlying note in which the borrower promises to pay. He quotes from an 1879 Supreme Court decision holding that “the assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity.”

If an assignment of the mortgage alone is a nullity, then the mortgage can no longer be enforced. The borrower would still owe the money, but no foreclosure would be possible and the borrower could sell the home without paying off the mortgage. The lender could sue the borrower, but collecting money from distressed former homeowners might be very difficult in many cases.

It was such an argument that persuaded the judge in Oregon to block a foreclosure being pushed by Bank of America on behalf of a subprime mortgage securitization put together by Goldman Sachs in 2006. That securitization, known as GSAMP Trust 2006-HE5, is a troubled one in which investors have already suffered substantial losses. The senior security of the trust, which was rated AAA at issuance, has not suffered losses so far. But Moody’s now rates it at Caa1, a very low junk bond category.

The problems with MERS began to come to light when “vice presidents” of the firm began to submit affidavits in foreclosures, saying the original note had been lost. In some cases those notes were signed by people who signed thousands of such affidavits, and have now admitted they did not actually review the files, as the affidavits said they had.

Nor were those people really employees of MERS. It turns out that MERS allows financial institutions that are its members to name anyone a vice president or assistant secretary of MERS. It seems a little unlikely that someone who had never been hired or paid by a company could be a vice president.

“Ironically, MERS Inc. — a company that pretends to own 60 percent of the nation’s residential mortgages — does not have any of its own employees but still purports to have ‘thousands’ of assistant secretaries and vice presidents,” Mr. Peterson wrote. “This corporate structure leads to inconsistent positions, conflicts of interest and confusion.”

In a case in Arkansas, the owner of a second mortgage foreclosed on a home without notifying MERS, which was listed as owning the first mortgage. When MERS sued to overturn the foreclosure, the state supreme court ruled that MERS had no case. It had lost nothing, the court concluded, because it was not the actual beneficiary of the first mortgage.

The MERS Web site asserts that “MERS has been designed to operate within the existing legal framework of all 50 states,” adding, “Any loan registered on the MERS System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded.” The company uses the slogan, “Process Loans, Not Paperwork.”

A spokeswoman for MERS, Karmela Lejarde, said Monday that Mr. Peterson was wrong about several things. “Every single court challenge to the standing of MERS in the foreclosure process has been upheld, either in the initial court proceeding or upon appeal, when proper evidence is presented before the court,” she said in an e-mail.

Asked about the Arkansas Supreme Court decision, she said “that particular case was not about foreclosures,” although it did involve an effort by MERS to overturn a foreclosure. She added that the decision was “in direct contravention to longstanding Arkansas law.”

It is possible that the courts in most if not all states will conclude that the details of how MERS functioned, even if not completely in accord with state law, should not prevent foreclosures.

But even if that happens, Mr. Levitin, the Georgetown professor, argues that there might be tax consequences that would further harm investors in mortgage securitizations. That is because the securitizations operate under a special provision of tax law that exempts them from taxation. But that status is predicated on the transfer of mortgages to the securitization when it was created. If that is not the case, that could cause a major tax problem.

In addition, Mr. Peterson argues that local governments might prevail if they sue, claiming that the basic operating structure of MERS involved the filing of false documents. In that case, they might be entitled to collect several mortgage recording fees per mortgage — money that presumably would also come out of the securitization trust.

All of these problems might have been avoided had Wall Street sought legislation in the states to assure that such issues would not be raised. It is not clear why that did not happen. Perhaps the lawyers saw no problem, or perhaps they feared that efforts to change the law would be blocked by county officials wanting to preserve a source of revenue from recording mortgage transactions. In any case, no laws were amended.

Now, Mr. Peterson wrote, the courts may be confronted with a difficult conundrum. “Had the parties to these transactions followed the simple policy of specifying in the documents who owns what, a vast amount of confusing litigation and commercial uncertainty could have been avoided. These anchorless liens now flail in the wind of our commercial tempest,” he wrote.

“Courts that come to understand this situation will be in a bitter predicament,” he wrote. A ruling against the securitizations would “throw the mortgage market into further turmoil.”

But ruling the other way, against the complaining borrowers, would have its own perils, he argued, in part because MERS has made it difficult and in some cases impossible to learn from public records just who owns a mortgage, despite a long tradition that such information must be publicly recorded.

“If the courts write opinions allowing MERS to act as a ubiquitous national proxy mortgagee, they will write into the American common law fundamental legal mischief that will plague generations to come,” he wrote.

If some courts do rule against MERS, the legal battle could be a long one. Real estate law is largely a matter of state law, leaving the 50 state supreme courts as the final arbiters.

Floyd Norris comments further on MERS in his blog at nytimes.com/norris.

26 Responses

  1. Great site. I have an added question. I did some checking and found that our original mortgage was listed as MERS. The original bank was purchased by another bank and our loan remodified and recorded a second time. Again MERS was listed. Today some how we have Wells Fargo as where we send the check. Two years ago we filed a Chapter 7 bankruptcy and did not reaffirm the mortgage loan. Still making mortgage payments on time every month though. It’s getting tougher to do that though. Wells Fargo of course doesn’t even want to talk about a refi due to the Chapter 7.

    My question/concern relates back to the mortgage being unsecured debt due to MERS and that means as unsecured debt it would have been erased in the Chapter 7 bankruptcy. So it looks like it’s going to get more interesting.

  2. And so we must ask ourselves again …

    If MERS is bankruptcy remote, how can it own anything?

    If you were to depose any of its Board of Directors (Hultman, Arnold, etc.), and you asked them about any particular assignment of mortgage to them by one of their Vice Presidents or Assistant Secretaries, with no indemnity and no E&O coverage, how much did they pay FOR VALUE RECEIVED?

    If MERS can’t own anything because it has no assets, what value did it pay? Where did the money come from? This makes the assignment a fraud because MERS can’t pay if it has no income to pay it with.

    The robosignors can be hung out to dry on this as well, especially when you pit their testimony against that of their “lack of principal”.

    Agency has everything to do with this situation. Where is the agency relationship when the agent indemnifies the principal for fraud. If the principal (by corporate resolution) accepts the agency status with exceptions, then the resolution can be challenged as to its legality because the agent’s fraud should be held against the principal who appointed them by resolution.

    This will come in handy during quiet title cases. Lack of agency makes for great proof in the disruption in the chain of title.

    For more info, see http://www.cloudedtitles.com

  3. […] “The worst outcome would be a conclusion that errors by financial institutions had decoupled the payment promises made by borrowers from the mortgages they signed. In that case, the mortgages would be invalid. … Home loan information […]

  4. Sherry H.
    In California you have the right to ask for a different judge, no reason need be given, you just can ask to have a different judge hear your case!
    I was a bankruptcy paralegal in San Bernardino.
    You only get to do this once in your case during your trial.
    And you have to do this before your trial gets started, tell the clerk immediately that you want a new judge to hear your case.

    Good luck and God bless
    cheryl

  5. Sherry H.
    In California you have the right to ask for a different judge, no reason need be given, you just can ask to have a different judge hear your case!
    I was a bankruptcy paralegal in San Bernardino.
    You only get to do this once in your case

  6. Thank you all, it has been a very long journey. We will see what happens, I have faith that whatever is supposed to happen will happen. It is interesting to me that so much is hitting the fan right now when I am right at the end of the rope. I have learned so much from this site over time, and do not ever want to be in a situation like this again. My family and I have lived in a way to stay on the right side of the law, the legal system is something I hope to stay away from again in the future. it is amazing how few people actually know what is happening with these issues, I didn’t until thrown into the fray. I would love to go back to my simple life.

  7. Leapfrog,

    Let me qualify my statement: the Ch. 7 BK ttee owns your property until the case is closed or until he formally abandons it.

  8. Sherry – I meant to say that the BK trustees convened a meeting, not the practicing attys down there.

  9. Sherry

    Don’t try to do this on your own. BK court is a specialized practice. It’s very clubby. There are only a handful of attys that actually know what they are doing there. I had them convene a meeting on how to stop me. It didn’t work. The judge told them they had to sell houses to me if it would benefit the estate, regardless of whether they thought there was any equity in them or not.

    This worked until they wised up and figured that if I was bidding on the houses, there must be equity in them. They would then hire their own appraisers to confirm this.

    The final straw was when the NY legislature said I was getting out of hand, and raised the homestead exemptions from $10k to $50k per person.

    Wait until you are discharged and the case is closed, then do you QT action in state court. Much simpler, and you can do this yourself. Not so in BK court.

  10. Leapfrog

    If you did this when I was prowling the BK courts, I would have pounced on you. In a 7, the Trustee is both the equitable and legal owner of all your non-exempt property. Your exemptions are listed by statute, and include your homestead exemption. The trustee continues to own the property until the case is closed, not just upon discharge. You bring an AP, and any ttee with half a brain is going to be licking his chops. That’s because he gets a piece of whatever action he can deliver to the unsecureds.

    I would just put in a bid to the trustee for his interest in your home, pay the homestead exemption, and then bring my own quiet title action against the lender.

    Now how do you think I know this?

  11. To Bob G about the BK: That is why if you go 7, you let your case discharge first but not close. Then you file AP against your pretender-lender to dispute lien validity. The rest of the case is discharged, except for the home.

    Hi Leapfrog, How do you let the Chapter 7 discharge but not close? How do I keep it from closing? Also how do I file an AP (Adversarial Proceeding?) against the pretender-lender to dispute lien validity if I cannot find an Attorney who will file the AP?

    The BK 7 is only in my name, not my husband’s, should I go ahead and file a BK 7 for him and find an Attorney that will file a AP for him, or should this be in my BK7 first which is close to discharge?

    This actually makes a little bit of sense since I have been writing letters requesting the wet signatures, etc. of the Servicing Company and the Trust Co. Can I file my own AP if an Attorney won’t?

  12. To Bob G about the BK: That is why if you go 7, you let your case discharge first but not close. Then you file AP against your pretender-lender to dispute lien validity. The rest of the case is discharged, except for the home.

  13. Cynthia H – check the federal civil rights statutes and see if you can sue the judge in federal court for violating your civil rights under color of law.

    Folks involved in BK: if the property becomes unsecured (note goes “poof”), you now have an asset that can be sold to satisfy your unsecured creditors. If you are worth more in liquidation (Ch. 7) then in a 13, your creditors can make a motion to have your case converted to a Ch. 7, have the Ch. 7 trustee sell the asset and distribute net proceeds to creditors. You’re only safeguard is your state’s homestead exemption. Check your Debtor & Creditor law to determine what it is.

    Also, you might want to consider a state Receivership rather than a Federal BK. Again, check your state statutes to see if this is a more desirable route to take.

  14. Check out this article in Bloomberg: Pimco, NY Fed Said to Seek BofA Repurchase of Mortgages

    at http://www.bloomberg.com/news/2010-10-19/pimco-new-york-fed-said-to-seek-bank-of-america-repurchase-of-mortgages.html

    Sounds like the bondholders are regrouping – this time with the NY Fed – and going after Countrywide (Bank of America) for blood. But the BOA assures, to paraphrase, everyone that it’s the economy, not the underwriting, to blame for all the worthless paper.

  15. DEUTSCHE BANK NATIONAL TRUST COMPANY AS TRUSTEE

    DENIED MOTION FOR RELIEF FROM STAY WITH PREJUDICE—FAT BOY ED TREDER ATTORNEY ON CASE FOR NDEX.

    MORE TO COME

    REPRESENTED BY:

    PAUL NGUYEN

    http://www.scribd.com/doc/39624863/BANKS-FAILED-REPS-AND-WARRANTIES-Banks-Pressed-by-Investors-to-Buy-Back-Mortgage-Backed-Loans-FAT-BOY-ATTORNEY-ED-TREDER

  16. Cheryl,
    My home is also Serviced (disserviced) by AHMSI (bankrupt company) and the Trust Co. is Deutsche. Are you moving from a chapter 7 to a chapter 13 to do your modification? My husband hasn’t filed yet, since he is on the road 6 days a week, so we were going to place him in a chapter 7 next week. But, my newest Attorney says the Automatic Stay Release goes with the house not the borrower, so the Release from Automatic stay through my Chapter 7 will allow the foreclosure to go through.

    A different Attorney wanted me to do a chapter 20, 7 because the unsecured debt with the other property and my volume of unsecured credit is too high for a 13. And then a 13 to modify the loan. If you reaffirm and modify the loan, aren’t you destroying the paper trail for the MERS?

  17. Cheryl, I wish I had known when my house was taken out of the bankruptcy. AHMSI did not own the loan (or house) and really had no right to take it out of the bankruptcy. Of course, the debt is unsecured so that can be taken out of the bankruptcy. I did have my second mortgage go poof in my bankruptcy. Burmese8@yahoo.com wwwchallengingforeclosure.com

  18. I’m going back to bankruptcy court (Chapter 7) because Deutsche tried to lift stay. We were requesting reaffirmation of mtg. On our terms though – meaning at modification rate. However, after reading so much on this site, does anyone have any advice, as far as: should I amend the bankruptcy before it is discharged, and include the house as “unsecured debt” and let Deutsche prove it is secured? Saxon supposedly assigned title to Deutsche in 2009 and Deutsche just filed the assignment June 23rd of this year!

  19. Cynthia, I am in the same situation in Northern CA, I am told by Attorneys who have even taken Neil Garfield’s course that the only Judge in our County will not budge so just lose your home of 20 years. We have owned property in Sonoma County for 30 years, worked, paid taxes, paid all of our bills up until 2009, been good citizens as we have been trained to be.

    I am in a chapter 7 due to “mortgage servicing fraud” in Jan. 2008 by Saxon Mortgage Services (Morgan Stanley) on a different property in Santa Rosa, CA. We have lost everything trying to keep our credit after Saxon Mortgage destroyed our credit on purpose by filing that we did not make our payments when we did. It took an Attorney and 9 months to fix the credit and take off the penalties, but it wiped out my business and all of our assets to keep things paid during that time to all the creditors. We did a short sale on that property in 3-10 to keep it from foreclosure (I should have let them foreclose).

    Now, our home of 20 years is being foreclosed on, we have not made the payment in a year. First because our income was destroyed and then because I found this site to figure out what happened with Saxon Mortgage and found out that my home is MERS too. The only thing we have left is our home and there is a Motion to Release the Automatic Stay on Thursday. 5 Attorneys says, sorry, you cannot win with this Judge, it will just cost you more money and you will lose anyway, just take your loses and start over! There ought to be a law, you yeah there probably is, but the Banksters don’t have to go by them.

    It has been almost 3 years since we were first defrauded by Saxon Mortgage Services, everything is gone, I am worn out from the fight, my husband has become a truck driver to allow us to eat and to continue to pay Attorneys who are unable to really do anything to stop us from losing our home. I want my life back, I want my business back, but now I have to pack up the house by myself, no money, no credit, no place to go. Thanks for listening.

  20. Sample Cause of Action in our complaints… (decoupling). Neil, your thoughts?

    ————-

    PRIMARY CAUSE OF ACTION – THE DEED OF TRUST IS NULL
    QUIET TITLE IS THEREFORE REMEDY TO THAT NULLITY

    1. Between July to August 2006, a now-bankrupt Countrywide Home Loans Inc. in conjunction with US Bank N.A., illegally decoupled (separated) ownership of a note, which listed Countrywide Home Loans Inc., – from ownership of the Arizona-recorded Deed of Trust, which in contrast listed the ‘beneficiary’ as MERS. (Maricopa County Recorder #2006-10000). This now-bankrupt Countrywide Home Loans Inc. note was created in the name a previous owner of Plaintiff’s property at _____________.

    2. During this origination period, Countrywide Home Loans Inc. and US Bank N.A. well knew long-standing black letter mortgage law – the 1872 US Supreme Court precedent Carpenter v. Longan, 83 U.S. 271, at 274, inter alia, which states any separation of the Note from the Deed of Trust is a Nullity.

    “The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity”.

    3. In the last 24 months, Carpenter v. Longan, 83 U.S. 271, at 274 has been repeatedly used as foundational precedent throughout this county, as the basis for illegal nullity in numerous courts including the Kansas Supreme Court in Landmark Nat’l Bank v. Kessler, 216 P.3d 158 (2009); and the Supreme Court of Arkansas in Mortgage Electronic Registration Systems. Inc. v. Southwest Homes of Arkansas, 2009 WL 723182 (2009), inter alia, and many others.

    COUNT I
    QUIET TITLE, A.R.S. § 12-1101, et seq.

    4. Plaintiff repeats, re-alleges, and incorporates by reference the foregoing paragraphs.
    5. Plaintiff holds title to its subject property at _________________.
    6. Plaintiff is credibly informed and believes that these non-real party(ies) in interest Defendants make some claim adverse to Plaintiff.
    7. A null security agreement is unenforceable for foreclosure or cloud on title in Arizona. Quiet Title is the only remaining option.
    8. Defendants’ Decoupling Separation violates the long-standing precedence of Carpenter v. Longan, 83 U.S. 271.

    9. Said Deed of Trust was indeed separated from the note, one or more times, making it null, deficient, and illegal.
    10. Said nullity is an improper cloud on title.
    11. WHEREFORE, Plaintiff requests that judgment be entered against Defendants as follows:
    A. Judgment establishing Plaintiff’s estate as described above;
    B. Judgment barring and forever estopping Defendants from having or claiming any right or title to the premises adverse to Plaintiff;
    C. Judgment for Plaintiff’s attorneys’ fees and costs;
    D. Such other and further relief as this Court deems just and proper.
    RESPECTFULLY SUBMITTED this 19th day of October 2010.

    ___________________________

  21. To Cynthia H in California,

    You have to be extremely thorough, please visit my website for a list of clear Fatal Flaws that make it more difficult for the court to rule for MERS.

    https://sites.google.com/site/mersfatalflawsincalifornia/

  22. actions to quiet title

  23. This excerpt is from Dale Whitman, Real Property, Probate and Trust Journal (Fall 1998 Issue), “Mortgage Drafting, Lessons from the Restatement of Mortgages” Dale Whitman served as Dean of the University of Missouri Law School and reporter for the Uniform NOn-Judicial Foreclosure Act, aproved in 2002. The excerpt of his 41 page article discussing Secondary Market Transfers of Mortgages, pp.’s 25-26;
    “Parties who hold the mortgage, but who cannot enforce the note it secures, can never experience a default because nothing is owed to them. Hence, such morgage holders can never foreclose the mortgage. In effect, splitting the mortgage from the note simply wastes the mortgage security without providing any benefit.” This is a very important part about this entire foreclosure mess. I hope by posting this, someone is able to use it to help a borrower.
    Burmese8@yahoo.com

  24. Good. This comes along just in time to amended my Chapter 13 plan to list the mortgage as unsecured with owner unknown.

  25. This is all great news. But when I discuss these issues with litigating attorneys in California they say the judges here are quite indifferent to the facts and that most judges in many counties dismiss these cases routinely. How do we make headway in California or other trust deed states?

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