Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

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DrKrbyLuv's picture
DrKrbyLuv
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Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

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Huffington Post  - Article by Ellen Brown

A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose -- on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.

Eliminating the "Straw Man" Shielding Lenders and Investors from Liability

The development of "electronic" mortgages managed by MERS went hand in hand with the "securitization" of mortgage loans -- chopping them into pieces and selling them off to investors. In the heyday of mortgage securitizations, before investors got wise to their risks, lenders would slice up loans, bundle them into "financial products" called "collateralized debt obligations" (CDOs), ostensibly insure them against default by wrapping them in derivatives called "credit default swaps," and sell them to pension funds, municipal funds, foreign investment funds, and so forth. There were many secured parties, and the pieces kept changing hands; but MERS supposedly kept track of all these changes electronically. MERS would register and record mortgage loans in its name, and it would bring foreclosure actions in its name. MERS not only facilitated the rapid turnover of mortgages and mortgage-backed securities, but it has served as a sort of "corporate shield" that protects investors from claims by borrowers concerning predatory lending practices. California attorney Timothy McCandless describes the problem like this:

[MERS] has reduced transparency in the mortgage market in two ways. First, consumers and their counsel can no longer turn to the public recording systems to learn the identity of the holder of their note. Today, county recording systems are increasingly full of one meaningless name, MERS, repeated over and over again. But more importantly, all across the country, MERS now brings foreclosure proceedings in its own name -- even though it is not the financial party in interest. This is problematic because MERS is not prepared for or equipped to provide responses to consumers' discovery requests with respect to predatory lending claims and defenses.

The real parties in interest concealed behind MERS have been made so faceless, however, that there is now no party with standing to foreclose. The Kansas Supreme Court stated that MERS' relationship "is more akin to that of a straw man than to a party possessing all the rights given a buyer."

The Potential Impact of 60 Million Fatally Flawed Mortgages

The banks arranging these mortgage-backed securities have typically served as trustees for the investors. When the trustees could not present timely written proof of ownership entitling them to foreclose, they would in the past file "lost-note affidavits" with the court; and judges usually let these foreclosures proceed without objection. But in October 2007, an intrepid federal judge in Cleveland put a halt to the practice. U.S. District Court Judge Christopher Boyko ruled that Deutsche Bank had not filed the proper paperwork to establish its right to foreclose on fourteen homes it was suing to repossess as trustee. Judges in many other states then came out with similar rulings.

The sole goal of the [bailout schemes] is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value -- right now almost 10 times their market worth. The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

... The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC . . . .

What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back.

The pirates seem to have captured the ship, and until now there has been no one to stop them. But 60 million mortgages with fatal defects in title could give aggrieved homeowners and securities holders the crowbar they need to exert some serious leverage on Congress -- serious enough perhaps even to pry the legislature loose from the powerful banking lobbies that now hold it in thrall.

Here is my response to Ellen's article  -  Thanks for another great article Ellen. I hope this legal action takes traction in other states.

When the mortgage crisis hit, we should have allowed Frannie, Freddie, etc. to go under. Then, the mortgages could have been bought at fair market value - by the U.S.

At the end of 2007, total mortgages were around $14.5 trillion (home, multifamily residential, commercial and farm mortgages). So, maybe we end paying $10 trillion. The money could be issued in U.S. notes (greenbacks), directly through the treasury and free from any interest or principal debt. Mortgage holders could be given a low rate, for example 1%.

The mortgage holders would pay the loans back to the American people which would become a huge cash-stream to lower taxes. Part of the 1% interest charge could be used to pay banks and other lending institutions to qualify borrowers, help collect the payments, handle the closing, etc., instead of adding a separate government agency.

If we are going to "monetize" debt solely backed by the people and property of the United States, why would we borrow our own money? Instead of issuing ruinous debt, we should be issuing money that would benefit the people.

Here is Ellen's response to my post  - 

Good thinking! This could also be done at the state level, with state-owned banks. States have huge amounts of capital which can be leveraged into roughly twenty times that sum in loans (with a 4% or 8% capital requirement, depending on risk weighting). A state-owned bank could scoop up mortgages in default and rent them back to the occupants until other terms could be renegotiated.

Larry

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NLP
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Re: Landmark Decision Promises Massive Relief for ...

Dr. Luv I have a question, I hope you can help;

I saw this piece yesterday and immediately went to my county recorders website to see if this is true in my area. 

Frequently MERS appears whenever a notice of default has been filed, but often is not the listed holder of the note.  Based on how I read Brown's article, the above described scenario means the mortgage company has contracted with MERS to file the notice of default and begin foreclosure although MERS has no legal stake in which to do this correct?

Can you add anything here?  Thanks.

DrKrbyLuv's picture
DrKrbyLuv
Status: Diamond Member (Offline)
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Posts: 1995
Re: Landmark Decision Promises Massive Relief for ...

NLP wrote:

Can you add anything here?  Thanks.

I asked Ellen the following question:

I posted your article at Chris Martenson’s website and received this question:

“Frequently MERS appears whenever a notice of default has been filed, but often is not the listed holder of the note. Based on how I read Brown’s article, the above described scenario means the mortgage company has contracted with MERS to file the notice of default and begin foreclosure although MERS has no legal stake in which to do this correct?

Ellen Brown, on September 23rd, 2009 at 5:51 pm Said:  Thanks for posting, and yes, that looks correct to me.

Wish I had more, hope this helps.

Larry

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