Marilyn M. Barnewall
January 5, 2012
To fully explain MERS or derivatives would take a book, not an article and neither is the subject of this article. I wrote a three article series titled Mortgage Mayhem and MERS, Hot Tubs and the FBI (referenced, Part I). I also wrote an article that explains derivatives titled Games the Big Boys Play.
For now, let’s define mortgage-backed derivatives as simply as possible… you need to understand this because derivatives are at the base of most foreclosure problems.
A stockbroker takes a number of lender-approved mortgages – say 500 – and puts them in an investment package. The packaged mortgages are sold to investors, worldwide.
Why do people invest in 500 packaged mortgages? Because, the 500 mortgages have borrowers who pay loan interest. If you’ve ever owned a home, you know that almost all of the house payment made goes to pay interest, not home equity (loan reduction) until the later years of the loan. If the average house payment is $1,000 that means the derivative package being offered gets $500,000 in monthly payments. Of that amount, 80-90 percent is loan interest. People invest in mortgage-backed derivatives to share in the profits of the loan interest paid when people make their mortgage payments each month. That’s a mortgage-backed derivative, in simple terms.
Until the real estate market was sent into free-fall by these same stockbrokers, it was a good investment. The loan loss rate on mortgages in America was traditionally very low, so the risk of loss by investing in mortgage-backed derivatives was also low.
How did stockbrokers cause the real estate market to collapse? Why would they kill the goose laying the golden egg when it created so much profit for them (brokers made commissions every time a client invested in one of their derivative products)?
Mortgage-backed securities were so easy to sell, and so profitable – and the risk of loss to the broker’s clients investing in them was low. Stockbrokers decided to put the same Deed of Trust into more than one derivative package. Some mortgages were put into as many as 40 packages. In other words, the same properties were offered to different investors more than once. Is it legal to sell the same investment product to different people, making each person the same promise of profitability? No. It isn’t. Has anyone yet gone to jail for doing this? No.
One interesting question is this: Are the banks against which Schneiderman filed charges in New York last week more guilty of committing a crime because they used MERS to avoid paying county charges for filing property documents than the stock brokers who sold the same property in numerous derivative products? No… but stockbrokers contribute more to political campaigns than banks.
A Florida couple paid cash for their home. They never had a mortgage. Yet, they were foreclosed. How could that happen? Easy. The prior owner’s mortgage had been put into numerous mortgage-backed derivative packages. Remember, there are 500 other mortgages (however many) in the derivative package and numerous mortgages have been put into many other packages… it’s easy to lose track of which Deed of Trust is where. The prior owner’s mortgage didn’t go unpaid – it was obviously paid, it was free and clear. But it was still being carried in one or more mortgage-backed derivatives and a lot of the other mortgages in one or more of those packages went bad. Investors sued to try and get their money back. The Florida couple’s mortgage was contained in a package that went bad, where investors sued and a court foreclosed. The couple sued Bank of America, by the way, and won.
As for MERS, it was created when Wall Street realized how profitable it was to sell mortgage-backed derivatives. They wanted as many Deeds of Trust as they could get to include in their derivative packages. It sounds ridiculous, I know. Why would a stockbroker want to become a mortgage lender?
In 2007, Lehman Brothers was creating mortgage-backed derivatives from liar loans mixed with “prime” (or quality) mortgage loans, and became one of the nation’s biggest providers of mortgages via three liar loan/sub-prime subsidiaries located around the country. Paying registration fees to counties – the traditional resource for keeping track of property ownership – was costly, so MERS was created. MERS was positioned as a trust company and Deeds of Trust were “put in trust” with MERS rather than registered properly with county authorities.
MERS says it was created to “streamline the mortgage process by using electronic commerce to eliminate paper.” MERS said it did this by acting as the mortgagee for loans registered on the system even if the loan was transferred between different banking institutions. Excuse me, MERS. A “mortgagee” is a lender, not a supposed trust.
Another legal decision.
Last February, a bankruptcy judge on Long Island ruled MERS did not have the right to transfer mortgages. Mr. Schneiderman’s statement said there are about 30 million active loans in the MERS system with approximately 20,000 “certifying officers” authorized to act on MERS’ behalf.
U.S. Bankruptcy Judge Robert E. Grossman, Central Islip, New York, said he knew his decision would have a “significant impact” when he wrote that the MERS’ membership rules don’t make it an agent of the banks that own the mortgages.
“MERS theory that it can act as a ‘common agent’ for undisclosed principals is not supported by the law,” Grossman wrote in his Decision. “MERS did not have authority, as ‘nominee’ or ‘agent’ to assign the mortgage absent a showing that it was given specific written directions by its principal.”
Merscorp, it says, was created in 1995 to “improve servicing after county offices couldn’t deal with the flood of mortgage transfers.” Though it’s true that the company tracks servicing rights and ownership interests in mortgage loans, allowing banks to buy and sell the loans without having to record the transfer with the county, it also played a major role in Wall Street’s ability to quickly bundle mortgages together in what the banks and brokers called “securitized trusts.”
Looking at history, it seems there were two primary motives for establishing MERS. First they wanted o avoid the costs of registering property ownership with counties. Second, they wanted a single source with which to file foreclosure notices (which, coincidentally, ensured that no more than one foreclosure at a time would ever be filed against the same property).
Different states have different legal terms and definitions regarding lawful foreclosure proceedings. California, for example, recognizes MERS (which is why it is probably one of the highest foreclosure states in the nation). Other states have found MERS not to be a legitimate trust and, like Judge Grossman, do not recognize it. Cities and counties all over the country are filing suit against mortgage lenders for substantial lost registration fees caused when lenders did not register the deed of trust with the proper authorities paid to keep track of ownership. In many cases, the result is property ownership that cannot be proven because no one knows who has legal possession of the Deed of Trust. It means properties included in the MERS database on which unlawful foreclosures were filed may not be able to get a quiet title. That means the people making house payments may never be able to prove absolutely that they own the home on which they’ve been paying for 30 years.
These two problems, derivatives and MERS, have cast into doubt the ownership of a large percentage of the homes financed in America. Yours may be included. You may, one day, without ever having missed a payment on your home, be served with a Notice of Foreclosure. Why? Because the Deed of Trust of the previous owner of your home was sold to a stockbroker who included it in a derivative that hasn’t failed yet – or which was assigned to MERS. The company to which you make our your house payment each month may be nothing more than a service company hired by a broker to make sure it receives your interest payments so it can pay its investors.
Colorado just passed legislation, HR 12-1156, which requires judges to ascertain the lawful assignment of ownership before foreclosure can occur. Here is the specific change:
Section 2 amends provisions governing the court order authorizing sale by a public trustee (rule 120 order, referring to C.R.C.P. 120) to place the burden of proof on the holder in all cases to demonstrate that the holder does in fact have a valid assignment or other basis for its assertion that it is entitled to foreclose on the property. Section 2 also explicitly states that the rule 120 order is not a final judgment adjudicating all claims of rights and interests in the property, as a judgment under rule 105 (a "quiet title judgment") would be.
In 2009, the U.S. Congress approved $700 billion – that is, $700,000,000,000 – in bailout funds for the financial services industry – actually, most of it went to Wall Street brokers who like to call themselves bankers.
By the summer of 2011, there were 6.45 million – that is, 6,450,000 – homes in foreclosure. I use the zeros because I sometimes think the reason many people are so unconscious about debt today is because the media stopped using zeros and began using the words “billion” and “trillion.” Using zeros makes the actual amounts so much more graphic.
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The point is, had the government given $700,000,000,000 (billion) to people unable to pay their mortgages rather than to stock brokers like Goldman Sachs, Morgan Stanley, J.P. Morgan, Bank of America, Citigroup, and Wells Fargo, et al – on average, say $100,000 to seven million people – to pay the total amount due on their primary residential mortgages, the economy would not have floundered so badly and almost all of the loans would be in process of being repaid. The mortgage banks wouldn’t have collapsed, the commercial banking industry wouldn’t be in crisis, lending would have remained robust (if a bit tamer than the norm), and we could have worked more quickly towards a healthy economy.
Washington couldn’t do that.
As Barack Obama. Chicago Mayor Rahm Emanuel, and Hillary Clinton have been quoted as saying, “Never let a good crisis go to waste.”
Nope. You’ve got to take advantage of it. And they did. They put the money in the hands of the primary contributor to Obama’s 2008 presidential campaign, Wall Street.
Can you smell it now?
Click here for part -----> 1,
© 2012 Marilyn M. Barnewall - All Rights Reserved
Marilyn MacGruder Barnewall began her career in 1956 as a journalist with the Wyoming Eagle in Cheyenne. During her 20 years (plus) as a banker and bank consultant, she wrote extensively for The American Banker, Bank Marketing Magazine, Trust Marketing Magazine, was U.S. Consulting Editor for Private Banker International (London/Dublin), and other major banking industry publications. She has written seven non-fiction books about banking and taught private banking at Colorado University for the American Bankers Association. She has authored seven banking books, one dog book, and two works of fiction (about banking, of course). She has served on numerous Boards in her community.
Barnewall is the former editor of The National Peace Officer Magazine and as a journalist has written guest editorials for the Denver Post, Rocky Mountain News and Newsweek, among others. On the Internet, she has written for News With Views, World Net Daily, Canada Free Press, Christian Business Daily, Business Reform, and others. She has been quoted in Time, Forbes, Wall Street Journal and other national and international publications. She can be found in Who's Who in America, Who's Who of American Women, Who's Who in Finance and Business, and Who's Who in the World.
Web site: http://marilynwrites.blogspot.com