Beyond ForeclosureGate: It Gets Even Uglier

Beyond ForeclosureGate: It Gets Uglier

by Michael Collins / April 23rd, 2011

The ForeclosureGate scandal poses a threat to Wall Street, the big banks, and the political establishment. If the public ever gets a complete picture of the personal, financial, and legal assault on citizens at their most vulnerable, the outrage will be endless.

Foreclosure practices lift the veil on a broader set of interlocking efforts to exploit those hardest hit by the endless economic hard times, citizens who become financially desperate due medical conditions. A 2007 study found that medical expenses or income losses related to medical crises among bankruptcy filers or family members triggered 62% of bankruptcies. There is no underground conspiracy. The facts are in plain sight.

ForeclosureGate represents the sum total illegal and unethical lending and collections activities during the real estate bubble. It continues today. Law professor and law school dean Christopher L. Peterson describes the contractual language for the sixty million contracts between borrowers and lenders as fictional since the boilerplate language names a universal surrogate as creditor (Mortgage Electronic Registration System), not the actual creditor. Other aspects of ForeclosureGate harmed homeowners but the contractual problems that the lenders created on their own pose the greatest threats.

When the Massachusetts Supreme Court upheld a lower court ruling that the actual creditor must named in the mortgage agreement (a legal requirement that the banks forgot to meet in their contracts), there was consternation on Wall Street. What would happen if a class action lawsuit challenged these flawed mortgages? Isn’t the Massachusetts decision the latest of many attacking the legal basis of the shoddy business practices and boilerplate industry contracts? What if homeowners started walking away from their underwater mortgages based on the legally flawed contracts? If there were a viable prospect of a class action suit against financial institutions threatening to invalidate these contracts, wouldn’t that crash the stock values of the big banks and some Wall Street firms?

The big banks and their partners on Wall Street need a preemptive strike to derail the legal process that threatens their existence. They may get a temporary reprieve through pending consent decrees from the United States Department of Justice and consortia of state attorney’s general. If that protection fails, big money will make every effort to buy a bill from Congress that absolves them retroactively, en masse. The consent decree might cost them a few billion dollars. That’s much better than owing the trillions in lost home values due to their contrived real estate bubble and stork market crash.

As bad as this is, it gets worse.

Beyond ForeclosureGate

The surface scandal is about fraudulent business practices and a systematic assault on homeowners by lenders, servicers, and the legal system. A much broader picture must be viewed in order to understand the utter contempt that the ruling elite has toward citizens and the depraved tactics used to express that contempt, all to serve endless desire to accumulate more money and power.

The set up began when we heard about the ownership society in the 2004 presidential election. President Bush defined ownership as taking the government out of our lives so more people could own homes and control their destinies. The foundation was home ownership. As Bush said on the campaign trail, “We’re creating a home — an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property.”¹

Then Federal Reserve Chairman Alan Greenspan was uncharacteristically coherent when he laid the foundation for the swindle earlier that year. Greenspan told the Credit Union National Association that the fixed rate mortgage was “an expensive way of financing a home.” He was clear when he advised lenders that, “consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.”²

The Chairman of the Federal Reserve and the president ratified the real estate bubble, already underway at the time, as political and financial doctrine. The advice was clear. Get an ARM, own your piece of the American Dream and spend that equity. Housing prices never go down, right?

Freddie Mack, Fannie Mae, Wall Street and the big banks provided the back room. Mortgage Backed Securities (MBS) derivatives were vastly expanded. This made it easy for more homebuyers to qualify for mortgages they might not otherwise get, credit standards dropped. Those with good credit saw an array of tantalizing zero interest loans and other mortgage products to maximize available cash and feed the stock market.

It was all good until it wasn’t.

The real scandal is the unfathomable loss of wealth and opportunities by the vast majority of citizens and the vicious attack on the most vulnerable citizens as a part that process. The attack continues and is worthy of review.

Foreclosure and Bankruptcy

Foreclosure is the down side of the ownership society. When you’re sold a bill of goods, a property that you were told you were qualified to buy, and you lose it, you are evicted from ownership island.

Before Congress passed the 2005 bankruptcy reform act, homeowners could avert foreclosure in many states by filing for bankruptcy. Not just anyone could qualify. The process of qualifying was difficult and, oftentimes humiliating. But homes were saved and families were preserved with a chance to start over.

A myth emerged of the bankruptcy abuser, a high-class sort of welfare cheat. These reckless people worked the system to rack up large debts that were subsequently wiped clean through bankruptcy. The alleged abuse of the system became the excuse for a major overhaul of bankruptcy law. The legislation passed the Senate with 74 yes votes and soon became law.

The changes since the 2005 legislation provide substantial benefits to creditors. Morgan et al. summarized the direct benefits to creditors in a forthcoming publication in the New York Fed’s Economic Policy Review. Before bankruptcy reform, the filer of a bankruptcy claim used to determine Chapter 7 or 13 filing status. That makes a difference in the amount and type of debt relief. The legislation imposes means test that determines precisely which chapter (7 or 13) filers must use. Significantly, chanter 13 filers retain more debt from medical and other unsecured credit.

Legal costs ranged from $600 to $1500 before bankruptcy reform. Legal fees now range between $2800 and $3700. Previously, there was no requirement for credit counseling prior to filing.

Filers must now document approved credit counseling six months before filing or face dismissal of their case (Morgan et al.). This counseling requirement can lead to unwarranted dismissals or inordinate delays in filing at a time when filers need relief.

Under the old law, only bankruptcy trustees appointed by the federal court could file claims of abuse by the filer. Under the new legislation, anyone can file a claim of bankruptcy abuse, which can lead to a dismissal of the cause. This is a huge benefit to lenders who wanted to keep citizens from realizing debt relief.

The Real Benefit for Big Money – Delayed Bankruptcy Filings

The new law makes it harder to file a claim, doubles costs, and gives the creditors a say in claiming fraud on the part of those who file claims. Significant delays in filing for bankruptcy became the norm.

From “Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors,” Lawless et al., American Bankruptcy Law Journal, Vol 82, 2008.

Time is money for loan servicers. A long delay before a bankruptcy filing, allows servicers the opportunity to add on special fees, many of which the borrower can’t comprehend. One thorough study showed that many of these fees were questionable. The longer it takes, the greater the revenue opportunities. Delay benefits creditors since loan payments continue at their original level.

What happened to those big spending, reckless bankruptcy abusers that were the rationale for the 2005 reforms? The following graph from the Consumer Bankruptcy Project shows that there is virtually no difference between the incomes of filers before and after bankruptcy reform. The majority of filers made between ten and forty thousand dollars a year before reform. That has remained virtually unchanged. The big spending abusers were and remain a mythical construct; the centerpiece of a diversion strategy to keep attention away from this never-ending gift to creditors.

From “Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors,” Lawless et al., American Bankruptcy Law Journal, Vol 82, 2008.

These newly empowered creditors were the same creditors who hired debt collectors to try and frighten people out of their filings. A major study found that 24% of filers reported that debt collectors told deliberate lies to avoid bankruptcy. They heard that filing for bankruptcy would lead to jail, job loss, or an IRS audit. Some were told that it was illegal to file for bankruptcy.³

The deck was stacked early against citizens and protection from creditors disappeared under the new law. The creditors, who so recklessly precipitated the economic collapse, came out on top. They were free to profit in any way they could from their new market,

What Causes Bankruptcy – Financial Shocks from Medical Expenses

Prior to the new law, the major cause of bankruptcy stemmed from medical care expenses and the resulting disruptions to families. Rather than the mythical big spender contrived by Congress, for nearly half of filers, major medical expenses, family tragedies, were the tipping point to a loss of financial viability.

The Consumer Bankruptcy Project audited a representative sample of bankruptcy filers in 2001. The audit found that 46% cited a “major medical cause” for bankruptcy. This includes the direct cost of uncovered medical bills for major illness or injury, lost work due to the same, and the need to mortgage the family home to cover medical costs.

Did Congress review this data? Were they intent on making it harder to file bankruptcy as a result of illness? When bankruptcy is delayed or simply not attainable, less money is available for needed medical care. Were the members supporting bankruptcy reform indifferent to the suffering compounded by their thoughtless legislation?

The situation is worse now. A comprehensive survey of those who filed bankruptcy in 2007 showed the increasing desperation of those faced with medical problems. When individuals or family members are in dire need of medical care, do they just sit home and suffer?

From “Medical Bankruptcy in the United States, 2007: Results of a National Study,” Himmelstein et al., American Journal of Medicine, 2009:04.

The results of this survey show that two thirds of bankruptcies result from medical care that they can’t afford or losses in income from medically required leave. Where are the big spending cheats?

Nihilists at the Helm

The big banks, Wall Street, the politicians they own, and the Federal Reserve Board created the real estate bubble in bad faith.

They knew or should have known:

• that the real estate bubble was unsustainable;
• when the bubble deflated, many homeowners would hit a financial wall; and, that
• when homeowners hit the wall, to maintain viability for their families, they would need relief of some sort.

What did the nihilists of the financial elite and their hit men walking the halls of power do with all this knowledge? They went ahead with the real estate bubble, fostered it, deregulated meaningful controls on the financial industry, and crafted a new bankruptcy law to stick it to filers. They knew or should have know that data from 2001 showed a very high rate of filings due to the financial stress of medical care and crises. Did they care? Do they care now? Has anything been done to correct this injustice?

While citizens suffer in financial distress, often due to illness, at the behest of influential bankers and investors, the Department of Justice crafts a settlement with lenders and their representatives to relieve them of the stern justice due for their specific crimes and the larger horrors they visit upon citizens, all in the name of short term profit.

We are most emphatically not a nation of laws. We are a nation where the law is used by a very few for their own purposes, without regard for the well being of the nation or its citizens. We are a lawless nation.

1. “Remarks to the National Association of Home Builders in Columbus, Ohio.” [↩]
2. “M. Collins, Money Party to Citizens – Drop Dead!, Scoop.” [↩]
3. Lawless, et al. “Did the Bankruptcy Reform Fail? An Empirical Study,” American Bankruptcy Law Journal, Vol 82, 2008.October 2008. [↩]

Michael Collins writes for Scoop Independent News and a variety of other web publications on election fraud and other corruptions of the new millennium. He is one of few to report on the ongoing struggles of Susan Lindauer, an activist accused of being a foreign agent, who was the subject of a government request for forced psychiatric medication. This article may be reproduced in whole or in part with attribution of authorship, a link to this article, and acknowledgment of images. Read other articles by Michael, or visit Michael's website.

This article was posted on Saturday, April 23rd, 2011 at 8:00am and is filed under Economy/Economics, Finance, Housing.

Chris Whalen's Terrifying Presentation On The 2011 Foreclosure Crisis

BUSINESS INSIDER
Clusterstock

Gus Lubin | Oct. 8, 2010, 2:04 PM

Check Out Chris Whalen's Terrifying Presentation On The 2011 Foreclosure Crisis

The biggest bear in foreclosure-gate is Institutional Risk Analytic's Chris Whalen.

At a conference Wednesday, Whalen said the foreclosure crisis would make 2008 look like a cakewalk (via Prag Cap):

"The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than ¼ of the way through the foreclosure process."

Whalen says subprime losses never really showed up on balance sheets. But a coming wave of foreclosures will make them a reality. At a time when banks are already stressed, these rising operational costs will cause bankruptcy.

Even without foreclosure-gate banks were screwed. As the government stalls the clear out of toxic assets, bank liabilities will rise even more.

Subprime losses have been hidden by bad accounting

Stress on the financial system has been kept back with stopgap measures

Efficiency ratios (the cost of generating revenue) spikes after recessions... but the trendline had already reached dangerous highs

Net interest income seems high, but this is only because of the Fed's zero interest rate policy

If zero interest rate policy continues, bank interest income (thus cash flow) will fall to inadequate levels

But the real red flag is in non-interest income, which peaked during the subprime frenzy -- and has not yet bottomed

Non-interest expenses will soar as foreclosures accelerate. Non-interest income will fall as the economy stalls

With trouble ahead, banks are pulling in credit to protect themselves

Need any more proof banks aren't lending?

Big banks are already losing control of the foreclosure wave -- which may knock out as many as 1 in 5 mortgages

Many large banks will be shattered. They will survive only through further nationalization

Tags: Foreclosure, Financial Crisis, Double-Dip, Features | Get Alerts for these topics »

Here's What Foreclosure-Gate Will Really Do to House Prices

Henry Blodget

CEO of Business Insider

Posted: October 13, 2010 01:45 PM

Here's What Foreclosure-Gate Will Really Do to House Prices

Thanks to revelations that they have been fabricating the documentation necessary to foreclose on some houses, the country's big banks have suspended foreclosures.

This gives us all an excuse to scream about the outrageousness of the bailed-out banks again. It also means that some folks will be able to spend a few more weeks or months in their houses.

But what does it mean for the housing market? And the banks?

For those who are praying for higher (or at least stable) house prices in the near-term, foreclosure-gate is good news: By stopping the flood of foreclosures onto the market, foreclosure-gate will reduce inventory-for-sale, which will likely act as a temporary positive for house prices. So homeowners may get one more temporary gift at the expense of house buyers.

Of course, when the foreclosure-gate moratorium ends, which it inevitably will, a sudden flood of foreclosures will hit the market, as the banks try to make up for lost time. And when that happens, prices will likely temporarily plunge. So sell while you can.

And what about the banks? What will happen to them now that they've stopped foreclosures?

Well, the banks will spend another few weeks or months eating the non-interest payments of folks they might otherwise have foreclosed on. Over time, if the foreclosure blockage remains in place, the number of non-payers will increase. Eventually, moreover, when the foreclosure block ends, the banks will likely suddenly have to play catch-up here, too, which will mean big write-offs and loan losses.

Overall, as bank analyst Chris Whalen recently observed, banks are quietly moving into the "non-operating REIT business"--owning a lot more real estate than they ever intended to. As anyone who has been stuck with an underwater investment property can attest, the carrying costs of holding distressed real-estate are significant. And Whalen believes that this will soon begin to eat into banks' profit margins. It will also continue to represent a huge "shadow inventory" that will keep the pressure on housing prices for years.

Now check out Chris Whalen's terrifying presentation on what this will do to banks

Follow Henry Blodget on Twitter: www.twitter.com/hblodget

ForeclosureGate: Oh, It Wasn't Just "Document Problems"

The Market Ticker ®

Commentary on capital markets, Category: Foreclosuregate

Oh, It Wasn't Just "Document Problems"?

Hmmm.... what's this?

Officials from the Justice department, the Department of Housing and Urban Development and 10 state attorneys general met with banks today, the second such meeting to negotiate a global settlement, Associate U.S. Attorney General Tom Perrelli said. The group is discussing potential fines and whether servicers should be required to reduce the principal on some home loans.

Criminal indictments? I see the Justice Department name in there....... appears not. "Fines" eh?

What about people who had their home stolen due to malfeasance (or worse) by these servicers?

Iowa Attorney General Thomas J. Miller, who is leading the talks on behalf of the states, said today’s agreements won’t limit his pursuit of penalties. In March, the attorneys general called for changes to foreclosure practices and mandatory loan modifications, including mortgage principal write downs.

Uh huh. The only penalty I'm interested in seeing is this one:

“There will be civil money penalties. The issue is time and amount,” acting Comptroller of the Currency John Walsh told reporters in a conference call.

The Federal Reserve issued a statement saying it plans to announce fines, calling them “appropriate.”

Absolutely. We can't lock people up or break up companies, revoke bank charters (even though the OCC has the right to do so, and The Fed can revoke membership too.)

As I've repeatedly noted if the penalty for robbing the local "Stop-n-Rob" (convenience store) was a monetary penalty that was limited to the amount of the loot you stole, the store would be robbed every fifteen minutes!

The agreements drew immediate fire from critics who said they could undermine the broader negotiations. Representative Maxine Waters, a California Democrat and member of the Financial Services Committee, called the orders “disappointing.”

Oh Maxine! Who writes appropriations bills?

Why hasn't Congress risen and told Justice that unless there are criminal prosecutions that the DOJ will be zeroed in appropriations process, shutting it down?

I know, I know - it's better to whine. That way you can claim to be "outraged" rather than actually getting off your ass and doing something about the problem!

---

Comment Posted 2011-04-13 13:54
by Karl Denninger
in Foreclosuregate

All Paperwork "Errors" Eh?

As we sit waiting with baited breath for the whitewash by our so-called Attorneys General that are going to screw the people they allegedly serve (that's the public, not the Banks) we get this:

The fraud perpetrated on the Court, Debtors, and trustee would be shocking if this Court had less experience concerning the conduct of mortgage servicers. One too many times, this Court has been witness to the shoddy practices and sloppy accountings of the mortgage service industry. With each revelation, one hopes that the bottom of the barrel has been reached and that the industry will self correct. Sadly, this does not appear to be reality. This case is one example of why their conduct comes at a high cost to the system and debtors.

Fraud. Got that? Not my words, the Judge's.

The question is not simply "did you pay as the bank asserts you had to?", and if the answer is "no", the remedy is "get the hell out of the house."

Uh uh. That would be fine if the banks, on a provable basis in each and every case, always performed exactly as the contract required. But we have seen time and time again that they don't in myriad ways. In the case at bar we have payments that were made and not applied, among others offenses and in fact according to the testimony reflected in this order the loan was current, had those payments been applied.

This case appears to date back more than three years to the latter half of 2007. For three years justice has been delayed and, but for a judge sitting at the Bar who refused to be snowed and steamrollered, justice would have been denied.

Fraud is not punished with a handslap and a promise not to do it again. It is punished via huge fines and imprisonment.

So where are those sanctions, Attorneys General?

Who are you blowing under the desk, Attorneys General, instead of doing your damn jobs?

Tickerguy thanks The Honorable Elizabeth Magner.

Hattip: 4closurefraud.org

The Economic Collapse

Are You Prepared For The Coming Economic Collapse And The Next Great Depression?

Foreclosure-Gate

If you work in the mortgage industry or for a title insurer, you might not want to make any plans for the next six months. Foreclosure-Gate is about to explode. It is being alleged that many prominent mortgage lenders have been using materially flawed paperwork to evict homeowners. Apparently officials at quite a few of these firms have been signing thousands upon thousands of foreclosure documents without even looking at them. In addition, it is being alleged that much of the documentation for these mortgages that are being foreclosed upon is either "improper" or is actually "missing". As lawyers start to smell blood in the water, lawsuits challenging these foreclosures have already started springing up from coast to coast. In fact, some are already calling Foreclosure-Gate the biggest fraud in the history of the capital markets. JPMorgan Chase, Ally Bank's GMAC Mortgage and PNC Financial have all suspended foreclosures in the 23 U.S. states where foreclosures must be approved by a judge. Bank of America has actually suspended foreclosures in all 50 states. Now, law enforcement authorities from coast to coast are calling for investigations into this controversy and it could be years before this thing gets unraveled.

This thing just seems to escalate with each passing day. It is being reported that the attorneys general of up to 40 U.S. states will be working together on a joint investigation into this foreclosure crisis. Lawmakers in both houses of the U.S. Congress, including Nancy Pelosi and Christopher Dodd, have called for an investigation to begin on the national level. U.S. Attorney General Eric Holder said last week that he is looking into the issue. Things are certainly getting very serious out there. Never before has there ever been such a national focus on foreclosure paperwork.

But apparently there are good reasons for such scrutiny....

*One GMAC Mortgage official admitted during a December 2009 deposition that his team of 13 people signed approximately 10,000 foreclosure documents a month without reading them.

*One Bank of America employee confessed during a Massachusetts bankruptcy case that she signed up to 8,000 foreclosure documents a month and typically did not look them over "because of the volume".

But the "robo-signing" aspect of Foreclosure-Gate is just the tip of the iceberg. Apparently there is a whole lot more going on than just a bunch of bad signatures.

Peter J. Henning, a professor at Wayne State University Law School in Detroit, was recently quoted by MSNBC as saying the following about Foreclosure-Gate....

"You've got so many potential avenues of liability. You don't even know the parameters of this yet."

The sad truth is that potentially millions of foreclosures across the United States could potentially be invalid because the securitization process has muddied the chain of ownership. In fact, an increasing number of judges from coast to coast have been ruling that the "owners" of the mortgage have no right to foreclose on a property because they lack clear title.

At the core of this title controversy is MERS - Mortgage Electronic Registration Systems. MERS is based in Reston, Virginia and it was created by the mortgage industry to enable that big financial firms to securitize and swap mortgages at high speed. MERS allowed these big financial firms to largely avoid the hassle of filling out more forms and submitting new filing fees every time that a mortgage was traded.

But now MERS is facing some very serious legal challenges. A recent article in Businessweek described the situation this way....

A lawsuit filed on September 28th in federal court in Louisville on behalf of all Kentucky homeowners claims that MERS was part of a conspiracy to create false promissory notes, affidavits, and mortgage assignments to be used in mortgage foreclosures. Similar class actions have been filed on behalf of homeowners in Florida and New York. Karmela Lejarde, a MERS spokeswoman, declined to comment on any pending litigation.

The reality is that as millions of U.S. mortgages have been bunched together and traded around the globe at lightning speed, it has become increasingly unclear who actually has title to them and who actually has the right to foreclose on these properties.

Title insurers have backed the titles of millions of these foreclosed properties and now potentially find themselves in a heap of trouble. Some of the biggest title insurers have already begun circling the wagons in an attempt at damage control. For example, one of the biggest title insurance companies in the United States, Old Republic National Title Insurance, has already declared that it will no longer write new policies for homes that have been foreclosed on by JPMorgan Chase and GMAC Mortgage.

So what happens if nearly all title insurers start avoiding foreclosed properties?

Won't that make it much more difficult for the banks to sell the massive backlog of foreclosed properties that they have accumulated?

In addition, Americans that have purchased foreclosed homes may now be facing some serious problems themselves. Millions of Americans may now "own" homes that they do not have clear title for. When it comes times to sell those homes, many Americans may find themselves unable to do so.

Needless to say, this is a complete and total mess.

Already, U.S. banks have a record number of foreclosed properties that they need to clear out, and now all of this scrutiny on foreclosure paperwork and all of these lawsuits are going to grind the process of getting these homes sold off to a standstill.

In fact, the true legacy of Foreclosure-Gate may be the massive amount of bank failures that it causes.

It would be difficult to understate how much of a nightmare Foreclosure-Gate is going to be for U.S. mortgage lenders. Having to go back through the paperwork of millions of old mortgages is going to be a complete and total disaster. If banks end up being unable to foreclose on a large number of bad mortgages, it could potentially be enough to put many banks out of commission for good. Not only that, but the legal fees that many of these banks will accumulate defending lawsuits related to Foreclosure-Gate will be astronomical.

The U.S. mortgage industry was already on the verge of death, and Foreclosure-Gate may just be the straw that broke the camel's back.

The reality is that U.S. banks are drowning in foreclosures and this current crisis is just going to make things a lot worse. Back in 2005, there were approximately 100,000 home repossessions in the United States. In 2009, there were approximately 1 million home repossessions in the U.S. and RealtyTrac is now projecting that there will be an all-time record of 1.2 million home repossessions in the United States this year.

For the U.S. mortgage industry, Foreclosure-Gate must feel like someone has dropped a bomb on them after they have already been beaten up and doused with gasoline.

Attorney Richard Kessler, who recently conducted a study that found serious errors in approximately three-fourths of court filings related to home repossessions, says that Foreclosure-Gate could haunt the U.S. mortgage industry for the next ten years....

"Defective documentation has created millions of blighted titles that will plague the nation for the next decade."

While it may be easy to beat up U.S. mortgage lenders and say that they deserve all this, let us not forget that this is going to impact a whole lot of other people too.

It is going to become much harder to get a mortgage. It is going to become much harder to buy a home. It is going to become much harder to sell a home. The U.S. housing industry is likely to suffer a significant downturn due to all of this. There is even a good chance that the entire U.S. economy could be dragged down for an extended period of time.

So no, Foreclosure-Gate is not good news for anyone.

Well, except maybe for lawyers.

But for virtually everyone else this is really bad news. Any hope that the U.S. housing industry would experience a quick recovery is completely and totally gone.

April 13, 2011 at 06:16:50

ForeclosureGate Deal - The Mandatory Cover Up

By Michael Collins (about the author)

Michael Collins

The Federal government is about to settle the ForeclosureGate affair, according to a report in the New York Times on April 9. The Times noted that twelve million homes will be lost by 2012. Home equity values are down by $5.6 trillion since the real estate crash.

The draft agreement released to American Banker shows another corporate-friendly deal designed to maintain the incumbent perpetrators at the expense of the people. (Image: zoonabar)

The proposed settlement culminates an effort by federal prosecutors to address strongly supported allegations of widespread mortgage fraud perpetrated on as many as sixty percent of current mortgage holders. Homeowners were sold mortgages, serviced for the loans, and, in some cases, subjected to foreclosure and eviction based on fictional contracts and collections practices that violate the most basic principles of contract law and specific federal code pertaining to fraudulent debt collection.

When Wall Street got massive bailouts in 2008, the ultimate rationale was, pass the bailouts or face a complete financial collapse. We are already hearing hints of a similar deep rationale in the ForeclosureGate affair. '

The proposed settlement will not move the evicted back to their homes. It will not establish a moratorium on foreclosures, running at over a million per year. There will be no cram downs forcing the banks to absorb part or all of inflated housing prices caused by a real estate bubble that the banks and Federal Reserve Board helped create. In addition, be assured that the settlement will not hold bankruptcy courts accountable nor the attorneys for their failure to spot obvious errors in bankruptcy proceedings, errors that would have invalidated many creditor claims.

The settlement, however, will create a private relief for the big banks, regulators, and politicians responsible for this mess. The relief will spare the bankers prosecution under existing laws and seriously complicate lawsuits that have the potential to devastate lending institutions by righting the wrongs done to citizens.

The housing market will limp along. The politicians who stood by during the entire affair will claim that justice has been done. The big banks will stumble in their comatose state scavenging for the next financial scheme. There will be no justice for the people, only rewards for the perpetrators.

How can we be sure of this? Because...

The gross violations of acceptable contract and business practices are facts broadly publicized by lenders and others involved. These practices cannot stand the scrutiny of basic legal analysis, as will be demonstrated below.

Some of the most powerful and wealthy individuals and corporations in the land committed these violations. Therefore, the most powerful and wealthy will escape justice and reap even more financial rewards. That's how things work in a rigged system. It's axiomatic.

Just look at the bipartisan response to the financial collapse of 2008. Those responsible received massive bailouts and regulatory favor while citizens paid the price, captives of a seemingly endless recession with limited assistance from the government they support.

Let's examine the legal threat to the big banks and the wholesale fraud committed by the mortgage registration system put in place by the bankers, the twin threats to the wealthy and powerful. The truth is worth knowing before the United States Department of Justice, the big banks, and the others involved lower the curtain on another act in our decline and fall.

The Legal Threat to the Big Banks Requires Private Relief from a Settlement

In the early 1990's, Fannie Mae, Freddie Mac, and the big banks created a new system for recording and registering the sale of real estate. Undeterred by centuries of common law and carefully developed statues in place across the fifty states, the lenders created MERS, the Mortgage Electronic Registration Systems.

MERS altered the function of registering home sales with county officials, named itself as the mortgagee (the lender), and assumed the role of creditor when it was time to foreclose on a property. There are sixty two million mortgages in the MERS system. Forget the fact that MERS had no legal precedent or basis in existing law. There was a higher authority operating, greed.

It all started when some clever Wall Streeter came up with the idea of combining subprime mortgages, loans sold to the least creditworthy buyers, and selling them as premium financial product called mortgage backed securities (MBS). The securities were marketed in the lightening fast international derivatives market. Even though it was required by law, recording the names true investors in the mortgage every time a MBS changed hands wouldn't do. It did not come close to meeting the requirements presented by the constant churn of the international derivatives market. Constant modifications would have prevented the sale of MBS derivatives.

What did the banks do? They created MERS, an entity that recorded and electronically stored real estate sales documents. In the boilerplate contracts for millions of home sales, MERS represented itself as both the loan holder and nominee for the loan holder

Having a real estate registration system in which there was only one named lender, recorded only one time, performed two critical functions. It eliminated the process of modifying loan registrations with county recorders each time the mortgagee changed, i.e., the MBS buyers. It also kept the names of the purchasers far from public scrutiny.

University of Utah law professor Christopher L Peterson recently documented the failures and highly questionable legal foundation of MERS. His comprehensive article was published by University of Cincinnati Law Review (Summer, 2010): Foreclosure, subprime mortgage lending, and the Mortgage Electronic Registration System. Peterson explains and elaborates the logic of key court decisions against MERS. These include the Kansas Supreme Court 2009 ruling and the highly publicized Massachusetts Supreme Court affirmation of the Ibanez case, which devastated MERS.

Peterson summarizes the foundation of his arguments elegantly

"Under this recording strategy, the originating lender makes a traditional mortgage loan by listing itself as the payee on the promissory note and as the mortgagee on the security instrument. The loan is then assigned to a seller for repackaging through securitization for investors. Instead of recording the assignment to the seller or the trust that will ultimately own the loan, however, the originator pays MERS a fee to record an assignment to MERS in the county records. MERS's counsel maintains that MERS becomes a mortgagee of record even though its ownership of the mortgage is fictional" (p. 1370).

MERS placed homeowner mortgage in a fictional system that, without any doubt, fails to meet standard of contract law. The real mortgagee (the lender) is never mentioned. MERS is represented as the lender from the start to finish.

When the mortgage finishes in a foreclosure, MERS compounds the fiction. Peterson notes:

"To move foreclosures along as quickly as possible, MERS has allowed actual mortgagees and loan assignees or their servicers to bring foreclosure actions in MERS's name, rather than in their own name" (p. 1372).

Peterson's arguments attacking the legal basis for MERS are devastating. (Headings in italics are from Peterson.)

A. MERS Does Not Own Legal Title to Mortgages Registered on its Database

This is a given.

"Federal consumer protection and bankruptcy law also suggests that the MERS does not own legal title to loans registered on its database. For example, under both the Truth in Lending Act and the Home Ownership and Equity Protection Act, a mortgage assignee can be liable for an original lender's violations of those statutes" (p.1378).

Since MERS does not own legal title, it follows that the loan process represents a deliberate misrepresentation. Surely, MERS knew that it didn't meet the standards for ownership. That didn't stop the organization and its creators, the big banks, from proceeding with over sixty million contracts for home purchases.

B. MERS Lacks Standing to Bring Foreclosure Actions

In order for MERS to act as the named party in a foreclosure action, it must have suffered injury by the homeowner's failure to make loan payments. Peterson is clear that the investors who purchased MBS can show a clear injury. However, these investors are not named in the recording documents. MERS is. Peterson makes a salient point with this question, "How [can] a debtor's failure to pay causes an injury in fact to MERS, a company that has no factual expectation of receiving loan payments or the proceeds of a foreclosure sale" (pp. 1381-1382).

How can MERS sue for legal relief when there is no injury, no financial harm?

The run rate for foreclosures has reached a million per year. That represents a great deal of harm to homeowners and their families. MERS caused this harm by its foreclosure actions, yet it never suffered any losses, the "injury" that Patterson references. MERS lacked the standing to initiate foreclosure actions and it lacked the right to allow lenders and servicers act in its name when they initiated foreclosures, as Peterson demonstrates.

C. MERS's Foreclosure Efforts Implicate the Federal Fair Debt Collection Practices Act

When MERS files bankruptcy claims or allows others to do so in its name, it participates in collecting the debt for the delinquent loan. It is a debt collector, plain and simple. As a result, it is subject to the Fair Debt Collection Practices Act (FDCPA). Why? As Peterson notes, "because MERS remits all proceeds of its collection activities to the actual owner of the loan (usually a securitization trustee), MERS is collecting a debt that is owed to another business entity" (p. 1386).

How does MERS, as debt collector, violate the FDCPA? Patterson makes these clear arguments:

"" the statute forbids harassment, false or misleading representations, and a variety of other unfair collection tactics, including threatening foreclosure when not legally entitled to do so.The statute also includes disclosure provisions, such as a requirement that debt collectors give consumers written validation and verification of the debt itself, as well as the identity of the creditor to prevent collection of debts or fees not actually owed" (p. 1386).

Since MERS is not the creditor, it has no right to represent itself as so. As such, it had no right to seek foreclosure. In doing so, MERS engaged in "unfair collection tactics." MERS failed to identify the true creditor for the mortgage. In doing so, it failed to meet disclosure provisions of the FDCPA and is subject to available penalties.

MERS initiates the collection of debts that is has no right to collect. This sounds like the definition of "constructive fraud: when the circumstances show that someone's actions give him/her an unfair advantage over another by unfair means (lying or not telling a buyer about defects in a product, for example)" Law.Com. MERS knew the defects in its mortgage agreements and system. It follows that the collections actions had no basis as well. The organization and its backers never thought anyone would ask.

D. Loans Recorded in MERS's Name May Lack Priority Against Subsequent Purchasers for Value and Bankruptcy Trustees

Peterson states:

"Under state law, if a mortgagee fails to properly record its mortgage, and then someone subsequently buys or lends against the home, the subsequent purchaser can often take priority over the first" (p. 1394).

MERS ignored the well-established legal processes that give priority to properly recorded mortgages. Peterson explains this at some length citing the original mortgage recording statute laying out the consistent requirements found across the nation today:

"" the very first American recording statute, adopted by Massachusetts Bay Colony in 1640, required recording the names of the parties-including both the names of the grauntor and grauntee""

This standard is virtually unchanged in the vast majority of state code. This legal standard, "does not contemplate nor allow obscuring actual ownership through naming only a mortgagee of record in nominee capacity" (p. 1396).

Since MERS ignored state law in recording mortgages, the claims to the property can be usurped by others with properly recorded documents. This throws into question any value that the purchasers of MBS have to recover their investments.

Absolute Requirements for any Settlement with the Lending Industry and Big Banks

The entire enterprise of mortgages issued through MERS ignored the most fundamental legal requirements set out in state law developed over centuries. The laws for recording real estate sales are in place, in part, to assure the right to property and protect investor interests. This was no mystery for the banks that created MERS. This was and it is their industry, their business. Their lawyers surely knew that they were up against the entire canon of common and state law. The most prominent legal justification was offered by Moody's. Petersen points out that Moody's offers no legal precedent for the claim that MERS was a legally viable enterprise. Legal advice justified acts that were clearly outside the law.

MERS recording procedures are in place in sixty million mortgages, at least. Petersen's analysis focused on the subprime market but the arguments and findings apply to every one of those sixty million mortgages. They were conceived and executed outside the law. Any US Department of Justice and the state attorneys general settlements must include the following provisions.

1) All MERS based mortgages must be declared invalid.

2) The MERS recording processes must be labeled a scheme that enabled the big banks to sell disastrous subprime mortgage backed securities.

3) MERS must also be labeled as a key player that facilitated the real estate bubble causing the purchase of inflated

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Michael Collins is a writer in the DC area who researches and comments on the corruptions of the new millennium. His articles focus on the financial manipulations of The Money Party, the abuse of power by government, and features on elections and (more...)

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mortgages. .

3) The MERS system is, therefore, a misrepresentation on its face. It wasn't created to meet any need in real estate finance. MERS services operated on the basis of deliberate misrepresentation.

4) The big banks and others involved knew this was the case. They are liable for the harm caused.

5) All foreclosures conducted by MERS or in MERS name must be declared null and void.

6) The victims of those foreclosures without legal basis must be restored to the homes they lost.

7) The homeowners that were victims of MERS foreclosures and evictions should receive adequate compensation through a formula favorable to homeowners.

8) Every MERS mortgage must be readjusted to a fair market value through the most favorable formula available to homeowners.

Anything short of these remedies rewards the perpetrators at the expense of the victims.

Without these remedies, citizens are fully justified in saying that the legal system is damaged beyond any hope of repair.

END

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Michael Collins is a writer in the DC area who researches and comments on the corruptions of the new millennium. His articles focus on the financial manipulations of The Money Party, the abuse of power by government, and features on elections and (more...)

The views expressed in this article are the sole responsibility of the author
and do not necessarily reflect those of this website or its editors.

Mortgage paperwork mess: ForclosureGate?

CBS News.com

60 Minutes

Mortgage paperwork mess: Next housing shock?

Scott Pelley reports how problems with mortgage documents are prompting lawsuits and could slow down the weak housing market

(CBS News)

If there was a question about whether we're headed for a second housing shock, that was settled last week with news that home prices have fallen a sixth consecutive month. Values are nearly back to levels of the Great Recession. One thing weighing on the economy is the huge number of foreclosed houses.

Many are stuck on the market for a reason you wouldn't expect: banks can't find the ownership documents.

Who really owns your mortgage?
Scott Pelley explains a bizarre aftershock of the U.S. financial collapse: An epidemic of forged and missing mortgage documents.

It's bizarre but, it turns out, Wall Street cut corners when it created those mortgage-backed investments that triggered the financial collapse. Now that banks want to evict people, they're unwinding these exotic investments to find, that often, the legal documents behind the mortgages aren't there. Caught in a jam of their own making, some companies appear to be resorting to forgery and phony paperwork to throw people - down on their luck - out of their homes.

In the 1930s we had breadlines; venture out before dawn in America today and you'll find mortgage lines. This past January in Los Angeles, 37,000 homeowners facing foreclosure showed up to an event to beg their bank for lower payments on their mortgage. Some people even slept on the sidewalk to get in line.

So many in the country are desperate now that they have to meet in convention centers coast to coast.

In February in Miami, 12,000 people showed up to a similar event. The line went down the block and doubled back twice.

Video: The next housing shock
Extra: Eviction reprieve
Extra: "Save the Dream" events

Dale DeFreitas lost her job and now fears her home is next. "It's very emotional because I just think about it. I don't wanna lose my home. I really don't," she told "60 Minutes" correspondent Scott Pelley.

"It's your American dream," he remarked.

"It was. And still is," she replied.

These convention center events are put on by the non-profit Neighborhood Assistance Corporation of America, which helps people figure what they can afford, and then walks them across the hall to bank representatives to ask for lower payments. More than half will get their mortgages adjusted, but the rest discover that they just can't keep their home.

For many that's when the real surprise comes in: these same banks have fouled up all of their own paperwork to a historic degree.

"In my mind this is an absolute, intentional fraud," Lynn Szymoniak, who is fighting foreclosure, told Pelley.

While trying to save her house, she discovered something we did not know: back when Wall Street was using algorithms and computers to engineer those disastrous mortgage-backed securities, it appears they didn't want old fashioned paperwork slowing down the profits.

"This was back when it was a white hot fevered pitch to move as many of these as possible," Pelley remarked.

"Exactly. When you could make a whole lotta money through securitization. And every other aspect of it could be done electronically, you know, key strokes. This was the only piece where somebody was supposed to actually go get documents, transfer the documents from one entity to the other. And it looks very much like they just eliminated that stuff all together," Szymoniak said.

Szymoniak's mortgage had been bundled with thousands of others into one of those Wall Street securities traded from investor to investor. When the bank took her to court, it first said it had lost her documents, including the critical assignment of mortgage which transfers ownership. But then, there was a courthouse surprise.

"They found all of your paperwork more than a year after they initially said that they had lost it?" Pelley asked.

"Yes," she replied.

Asked if that seemed suspicious to her, Szymoniak said, "Yes, absolutely. What do you imagine? It fell behind the file cabinet? Where was all of this? 'We had it, we own it, we lost it.' And then more recently, everyone is coming in saying, 'Hey we found it. Isn't that wonderful?'"

But what the bank may not have known is that Szymoniak is a lawyer and fraud investigator with a specialty in forged documents. She has trained FBI agents.

She told Pelley she asked for copies of those documents.

Asked what she found, Szymoniak told Pelley, "When I looked at the assignment of my mortgage, and this is the assignment: it looked that even the date they put in, which was 10/17/08, was several months after they sued me for foreclosure. So, what they were saying to the court was, 'We sued her in July of 2008 and we acquired this mortgage in October of 2008.' It made absolutely no sense."

Curious, she used her legal training to go online and research 10,000 mortgages.

"I often, because of my training, look for patterns. And then I began to find the strange signatures," she explained.

One of the strangest signatures belonged to the bank vice president who had signed Szymoniak's newly discovered mortgage documents. The name is Linda Green. But, on thousands of other mortgages, the style of Green's signature changed a lot.

And, even more remarkable, Szymoniak found Green was vice president of 20 banks - all at the same time.

Where did all those documents come from? We went searching for "the" Linda Green and found her in rural Georgia. She told us she has never been a bank vice president.

In 2003, she was a shipping clerk for auto parts when her grandson told her about a job at a company called Docx. The company, that was once housed in Alpharetta, Ga., was a sweatshop for forged mortgage documents.

"They were sitting in a room signing their name as fast as they possibly could to any kind of nonsense document that was put in front of them," Szymoniak said.

Docx, and companies like it, were recreating missing mortgage assignments for the banks and providing the legally required signatures of bank vice presidents and notaries. Linda Green says she was named a bank vice president by Docx because her name was short and easy to spell. As demand exploded, Docx needed more Linda Greens.

"So you're Linda Green?" Pelley asked Chris Pendley.

"Yeah, can't you tell?" Pendley, who is a man, replied.

Pendley worked at Docx at the same time and signed as Linda Green.

"When you came in to Docx on your first day, what did they tell you your job was gonna be?" Pelley asked.

"They told me that I was gonna be signing documents for using someone else's name," Pendley remembered.

"Did you think there was something strange about that in the beginning?" Pelley asked.

"Yeah, it seemed a little strange. But they told us and they repeatedly told us that everything was above board and it was legal," Pendley said.

Pendley told Pelley he had no previous experience in banking, in legal documents, and that there were no requirements for the job.

"You had to be able to hold a pen?" Pelley remarked.

"Hold a pen," he agreed.

Asked if he understood what these documents were, Pendley said, "Not really."

"But you were signing these documents as if you were an officer of the bank?" Pelley pointed out.

"Correct," Pendley said.

"How many banks were you vice president of in a given day?" Pelley asked.

"I would guess somewhere around five to six," Pendley said.

He was paid $10 an hour for this job.

Pendley showed us how he signed mortgage documents as "Linda Green." He told us Docx employees had to sign at least 350 an hour. Pendley estimates that he alone did 4,000 a day.

Shawanna Crite worked at Docx and was also a "Linda Green." She says she both signed and notarized the mortgage documents.

Asked what the role of the notary was, Crite said, "We were to make sure that everyone on the document was who they said they were and notarize the documents."

"But the people who were signing the documents weren't who they said they were," Pelley pointed out. "So if Chris Pendley was signing for Linda Green, you'd notarize that document."

"Yes," Crite said.

She told Pelley she was told that was okay.

"What do you know now?" Pelley asked.

"That it wasn't right," Crite said.

The real Linda Green didn't want to be interviewed. But she said that some of the bank vice presidents at Docx were high school kids. Their signatures were entered into evidence in untold thousands of foreclosure suits that sent families packing.

"It was a common practice in the last few years to flood the courts with these documents," Lynn Szymoniak told Pelley.

A look at some of the junk the courts were flooded with shows that sometimes the document mill didn't even bother to fill in the names of the supposed owners.

To them, it seemed like a joke.

"Instead of the name of the bank here that was acquiring the loan, this one says, 'Bogus Assignee for intervening assignments.' That's who acquired the loan," Szymoniak pointed out.

"This was an actual document that was in litigation?" Pelley asked, looking at the document.

"Yes," she said. "And what corporation assigned this loan? A corporation identified as 'A Bad Bene.' Excuse me? When I saw that I was just absolutely amazed."

"What does that mean, 'A Bad Bene'?" Pelley asked.

"It could possibly mean a bad beneficiary. I have no idea what it meant. Here's Linda Green. And this time, instead of being a Vice President of American Home Mortgage Servicing, she's Vice President of A Bad Beanie," Szymoniak said.

Szymoniak says that the banks whose paperwork was handled by the Docx forgery mill include Wells Fargo, HSBC, Deutsche Bank, Citibank, U.S. Bank and Bank of America. We contacted all of them. Each said it farmed out its mortgage servicing work to other companies and it was those mortgage servicing firms that hired Docx.

Docx was owned by a company called LPS, a $2 billion firm that calls itself the nation's leading provider of mortgage processing services. LPS told us that when it found out about the phony signatures in 2009, it shut Docx down. The FBI and several states are investigating.

There were a million foreclosures last year. And there will be another million this year - those lawsuits are forcing open those bundled, mortgage-backed securities that Wall Street cooked up in the mid 2000s, and exposing a lack of ownership documents all across the country.

"It's astonishing to me that this had become as pervasive as a problem that it is," Sheila Bair, the chairman of the Federal Deposit Insurance Corporation (FDIC) told Pelley.

"It got sloppy," he remarked.

"It got very sloppy," she agreed.

As FDIC chairman, Bair is one of the government's top banking regulators.

"You just described it as pervasive," Pelley pointed out.

"Yeah. It is pervasive. It absolutely is pervasive. It was just a matter of cutting corners, not spending enough money and not having quality controls," she said.

Incompetent banking, back then, is causing foreclosure ghettos today. Although banks say courts have been accepting their paperwork, now that's changing as desperate homeowners countersue banks over the document fiasco. This leaves houses unsold indefinitely, undermining the recovery.

"I am very worried about if this starts getting out of hand the kind of impact it will have," Bair said.

"These are lawsuits by homeowners who are being foreclosed upon," Pelley remarked.

"Or have, are in the process, or have already been foreclosed on," she said.

"Saying, prove it?" Pelley asked. "Prove that you own this."

"Exactly," Bair said.

"How big an issue is that gonna be? There are 30,000 today," Pelley asked.

"I think this litigation could easily get out of control. And we would like to get ahead of it. We're already feeling like we're falling behind it," Bair said.

Chairman Bair thinks rotten mortgage documents are so threatening to the economy that the government should force banks to pay into a massive fund.

"You think there needs to be a cleanup fund like for a natural disaster?" Pelley asked.

"I do. Yes, somewhat like that. Yes, this is yes this is one of human-making, but yes," Bair said.

"You don't want to give an exact dollar amount for this cleanup fund, but what are we talking about. Is it billions?" Pelley asked.

"Yes. I would assume it would be billions. Yes," she replied.

Bair's proposed cleanup fund would pay homeowners to accept a bank's ownership claim without a lawsuit. She says this could be cheaper for banks than trying to recreate the missing documents legitimately - not through document mills.

"I think eventually the bank could prove who owned it. But it would take, it would take a lot of time and expense," Bair said.

"You know none of the major banks were willing to sit down with us and talk to us about this. Not even the American Bankers Association," Pelley pointed out.

"I'm sorry to hear that," Bair said.

Asked why she thinks that is, Bair told Pelley, "They're feeling very defensive now. And so I can only assume that is the reason that they declined."

Banks are defensive because all 50 state attorneys general want to punish them: the states are seeking about $20 billion in damages for what they say is the irresponsible, perhaps criminal way, that some mortgage companies handled what is, for most folks, the most important investment of their lives