We are faced with a choice

(11AM EST – promoted by Nightprowlkitty)

  Rep. Damon Silvers, a member of the independent Congressional Oversight Panel, asked what is probably the most important question facing America today.

 We can either have a rational resolution to the foreclosure crisis or we can preserve the capital structure of the banks. We can’t do both.

 Which should we do?

 The question doesn’t sound all that ominous, but it is. In essence we must chose between protecting the TooBigToFail Wall Street banks, or the rule of law.

 That may sound overly dramatic, and I wouldn’t blame you if that was your initial reaction, but surprisingly the choice really is that simple.

  Up to this point the media has reported the foreclosure mess as a case of incompetence on the part of the mortgage servicers and banks. Just something expensive that we’ll have to put up with until it gets “straightened out”.

  That couldn’t be further from the truth.

“The whole essence of this crisis is fraud and unless we restore the rule of law and transparency of disclosure, we are not going to fix this.”

– Laurence J. Kotlikoff, economics professor at Boston University

 There is immense amounts of information coming out about this crisis, so its easy to miss the really juicy parts. Let’s start with the testimony of Richard Bowen, former senior vice-president and business chief underwriter with CitiMortgage Inc., before the FCIC.

  In his testimony he talked about the $50 Billion in mortgages that his division bought, and then repackaged and sold to Fannie Mae and Freddie Mac.

 “In mid-2006 I discovered that over 60% of these mortgages purchased and sold were defective. Because Citi had given reps and warrants to the investors that the mortgages were not defective, the investors could force Citi to repurchase many billions of dollars of these defective assets…

 “We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80% of production.”

 Bowen’s warnings were ignored at Citi, and now the taxpayer owns 75% of Citigroup. The scary thing is that Citi wasn’t the worse offender. Countrywide, now owned by Bank of America, was (although Washington Mutual was a close runner-up).

 Countrywide originated over $1.4 trillion of mortgages in 2005-2007. MBIA alleges that over 90% of the defaulted or delinquent loans in the Countrywide securitizations show material discrepancies.

 Simply put, BofA doesn’t have that kind of money. It’s not like there isn’t a legitimate reason for these lawsuits against the banks. Countrywide has already settled with the New York pension funds for $624 million, and the line is growing by the day.

 “‘This appears to be a massive fraud perpetrated on the investing public on a scale never before seen,’ Rosner added.”

 The word of the day is ‘fraud’ kids.

 The banks didn’t get into trouble from just incompetence. These people are both smart and greedy.

 The FBI warned about an “epidemic” of fraud in the mortgage industry all the way back in 2004. They predicted it could lead to the “next S&L crisis”.

  In November 2007, the rating agency Fitch dared to look at some loan files. It found fraud in nearly every single file reviewed.

 Matthew Lee, vice-president of Lehman Brothers, was fired without advanced notice for trying to expose the fraud in his company.

 It’s foolish to believe that this is all some sort of big misunderstanding. The missing foreclosure documents wasn’t an accident. It was by design.

 according to a court filing last year by the Florida Bankers Association, it was routine practice among its members to destroy the original note underlying a property when it was converted to an electronic file.

 What is the advantage of destroying the original note? One advantage was being able to sell the same note to multiple investors. It turns out that this practice was somewhat common.

  The foreclosure fraud is so blatant that the foreclosure mills have published price lists for forging documents. The prices are very reasonable. The price list includes such things as “Create Missing Intervening Assignment,” $35; “Cure Defective Assignment,” $12.95; “Recreate Entire Collateral File,” $95.

  How do you recreate the original note if you don’t have it?

The less sinister (but larger) problems

 It wasn’t all just fraud. Sometimes the people in the financial industry just wanted to take shortcuts. The thing is, the “innovations” may not have been legal.

 For example, the common practice of transferring a promissory note underlying a property to a trust without identifying it, known as an assignment in blank, may run afoul of rules governing the structure of the security.

  “The danger here is that the note would not be considered a qualified mortgage,” said Robert Willens, an authority on tax law, “an obligation which is principally secured by an interest in real property and which is transferred to the Remic on the start-up day.” If, within three months, substantially all the assets of the entity do not consist of qualified mortgages and permitted investments, “the entity would not constitute,” he said.

 The omission of citation of the mortgage income stream owner was intentional to avoid tax obligations. The result of this being overturned would be a big tax hit for investors, a tax hit that will wind up in court with the investors suing the banks who sold them the notes.

  What’s more, if the loan originator failed to provide the required documentation then a “true sale” may never have happened. That’s a recipe for chaos in the courts.

 However, this isn’t the biggest problem that we could be looking at.

The biggest problem involves a company that doesn’t exist called MERS (Mortgage Electronic Registration System).

  The big banks have been using this system since the 1990’s. Foreclosure victims have sued the MERS system in the past without success. However, that was before this latest crisis.

 MERS lets banks electronically register their sales of home loans so they can avoid trudging down to the county land-records office. According to its website, MERS is owned by the largest lenders in the country including Bank of America, Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo, in addition to Fannie Mae and Freddie Mac, which own or guarantee more than half of the $11 trillion U.S. mortgage market.

  In March 2009, U.S. Bankruptcy Judge Linda B. Riegle in Las Vegas decided MERS wasn’t a true beneficiary under a trust deed. Since March 2009, supreme courts in Arkansas, Kansas and Maine have found that MERS had no standing in foreclosure proceedings under their states’ laws. The company suffers no injury and lends no money, the panels said.

 The ruling of “suffers no injury” is one of the founding tenants of our common law system. You can’t just wave a magic wand and make that go away.

  What’s more, we are talking about 50 different state mortgage laws, thus a quick law from Congress won’t hold up.

 No state legislature ever authorized the change in property recording to the MERS system.

 As a practical matter, the incoherence of MERS’ legal position is exacerbated by a corporate structure that is so unorthodox as to arguably be considered fraudulent.

 There’s that word again.

MERS invites financial companies to enter names of their own employees into a MERS webpage which then automatically regurgitates boilerplate “corporate resolutions” that purport to name the employees of other companies as “certifying officers” of MERS. These certifying officers also take job titles from MERS stylizing themselves as either assistant secretaries or vice presidents of the MERS, rather than the company that actually employs them….

 MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each.

 Oh, yeah. This sounds real legitimate, in the same way a mob front company is legit.

  The U.S. Supreme Court has already ruled in the past that “the note and the mortgage are inseparable” in Carpenter v. Longan. Yet the MERS business model is based around seperating the note and mortgage. The Statute of Frauds requires that all agreements to be performed over more than a year’s time, or in which interest in real property is conveyed, must be in writing and bear an actual signature by the party so bound.

  Which brings us back to the question Damon Silvers asked. Are we going to uphold 400 years of property law, or are we going to sacrifice the rule of law to protect the Wall Street banks yet again?

The cover-up

 Asked in “Inside Job” why there’s been no systematic investigation of the 2008 crash, Nouriel Roubini answers: “Because then you’d find the culprits.”

  The Obama Administration appears to be following the lead of the corrupt Republicans that preceded it when it comes to “fixing” this problem.

 The chairperson of the Federal Deposit Insurance Corporation recently suggested a solution to the on-going mortgage and foreclosures scandal. FDIC Chair Sheila Bair proposed that the banks involved would be granted “legal protection from lawsuits” in exchange for granting struggling homeowners a minimum of 25 percent reduction in monthly mortgage payments.

 “Legal protection from lawsuits”? Are you kidding me?

 I’m not sure if what Bair is proposing is a bribe or a fine, but it certainly isn’t the rule of law. When did protection from legitimate lawsuits become something that gets sold to the highest bidder?

 Of course Congress is even worse. Their first reaction was to protect their Wall Street owners at no cost.

 This disregard of criminal behavior is so widespread, no wonder there is a grassroots backlash against all incumbents.

 There was no action on the foreclosure crisis and no serious attempt to investigate the causes of the crisis. The SEC has brought only a handful of civil cases ending in trivial fines, with neither firms nor individuals required to admit any wrongdoing.

  Most tellingly, there has not been a single criminal prosecution of any firm or any individual senior financial executive — literally zero — and, of course, no appointment of a special prosecutor. While we can debate the extent to which fraud caused the crisis, and precisely how much fraud was committed, the answer is clearly not zero.

 There are two things we can be certain of: 1) Congress will do nothing to address this problem for the next several weeks, and even then it might be January before anything serious is proposed. 2) The Republican Congress will be even more obsequious to Wall Street than the Democratic Congress.

 So the only question left is what this whole mess will cost? To answer that I refer once again to Damon Silvers.

 Let me tell you what the Fed says they’re worth. The Fed tells us they’re worth 50 cents on the dollar. So if the Fed’s request to Bank of America is honored, right, Bank of America, assuming they are carrying these bonds, assuming when they buy them back they mark them to market, Bank of America will take a $23 billion loss.

“The Federal Reserve further informs us that there is nothing particularly unique about that particular set of mortgage-backed securities — meaning they have not been chosen…because they’re particularly bad. They believe they are of a common quality with the rest of Bank of America’s underwritten mortgage-backed securities. There are $2 trillion [worth] of Bank of America’s underwritten mortgage-backed securities.

“Five such deals — five such requests, if honored to Bank of America…will amount to more than the current market capitalization of Bank of America, which is $115 billion.

“Now do you wish to retract your statement that there is no systemic risk in this situation? And the word is ‘risk’ — not ‘certainty’ — but ‘risk’? And I would urge you to do so, because these things can be embarrassing later.”

 TARP 2 anyone?


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    • gjohnsit on October 29, 2010 at 09:24
  1. how they diffuse these “financial weapons of mass destruction”….


  2. People are just now beginning to realize how radical a change in title recordation has occurred when a strawman, MERS (a corporate creation of the banks), is permitted to be the deed record holder of mortgage lien rights.

    Allowing a strawman, like MERS, to be the deed record holder of lien rights, changes a public, transparent and open land title recording system into a private, secretive title recording system run by the banks.

    Under the MERS system, one can not go to the deed records and determine who needs to be paid off to get clear title.  The law has always required the beneficiary/grantee of the lien to be identifiable so that the deed records would be clear as to when the proper party had been paid and the deed records would be clear as to whether the party had released any lien.

    Local state courts simply cannot allow the MERS process to flourish and take over, once they realize what the MERS process has done to the public process of land title recording.  This is the turf of the state courts and they are not going to give it up.  They also have their own financial interest in preserving the public, transparent system.  The MERS system deprives counties of badly needed income that the counties make on deed recording fees.

    The rule of law by the state courts will beat the banks on this issue and there is nothing the US Supreme Court or Congress can do to preserve the banks even if they wanted to.

    One more point.  The separation from the mortgage note from the mortgage lien is not the entire story here.  It is the intentional separation of the lien and the note from each other rather than the accidental, mistaken or negligent separation of the lien from the note.  Many states do allow a lien and a note to be accidentally or mistakenly or negligently separated from each other and then allow the note and lien to be reunited where it is equitable to do so.  But the MERS system intentionally separates the note and the lien from each other from the very start.

    • banger on October 30, 2010 at 20:35

    No serious prosecutions. They may pull in a few people who are out of favor with the oligarchs just to pretend to be honest.

    We are no longer even close to being a society of laws. The oligarchs rule by decree. Welcome to the neo-feudal reality of our lives!

    Even writing about it seems kind of pointless–we all know the society is being run by criminals and we ought to know that there isn’t a fucking thing we can do about it–unless we are willing to risk our lives.

  3. upon political alienation of the states from the Federal

    Government. How this plays out is anybody’s guess. It may lead to a constitutional crisis, but instead of North South, it may be Federalism itself that begins to dissolve.

    My take is that the execution of war has become so burdensome to the states, that it is coming closer to tyrany every day. There is ultimately a limit to the effectiveness of propaganda. Patriotism, Nationalism always exhaust themselves. History shows it bleeds a nation dry and corrupts its entire culture. It flails as it rots.

    This same constitutional crisis is/will also reflect the economic destabilization caused by the Federal Government giving favored status to corporations and allowing their favored status to regulate all commercial and financial transactions throughout the states. The Treasury Department, The Federal Reserve, the IRS and the all powerful Commerce Clause exercised by Congress (among other institutions and political/legal levers) will become (and actually are now) tools of state oppression.

    The Civil Rights movements is not at all analogous. The Federal Government got involved because it was obligated to carry out the Civil War Amendments and protect the natural rights of all people. Corporations today do not only have standing like flesh and blood people, but they are now basically deemed to have natural rights themselves to implement the national economic policy, as if this was their divine right. It is like the Robber Barons of old and the Church teaming up with the Government to create a new religion.  

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