Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

[Chomsky]

There's a thread on this here.

[ThePythonicCow]

Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

I wonder if the following Kansas ruling, if adopted nationwide, is potentially as significant as Ellen Brown suggests. As I read this article, she says this could mean that (1) some 60 million are blessed with mortgages that can no longer be collected, and (2) some very large banks that issued mortgage backed securities (MBS) would be forced into bankruptcy because they would be faced with legal demands to buy back this MBS paper because it was fraudulent.

That would be a day of national celebration. JPMorgan and such go bankrupt and 60 million mortgages are nullified. It could eclipse V-E (Victory in Europe, after World War II) day!

It sounds too good to have any chance of happening.

This article was posted at http://www.huffingtonpost.com/ellen-..._b_292333.html

==================================

by Ellen Brown, Author of "Web of Debt"
Posted: September 21, 2009 03:03 PM

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. In effect, the securitization conduit attempts to use a faceless and seemingly innocent proxy with no knowledge of predatory origination or servicing behavior to do the dirty work of seizing the consumer's home ... So imposing is this opaque corporate wall, that in a "vast" number of foreclosures, MERS actually succeeds in foreclosing without producing the original note -- the legal sine qua non of foreclosure -- much less documentation that could support predatory lending 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 court opined:

By statute, assignment of the mortgage carries with it the assignment of the debt ... Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust. [Citations omitted; emphasis added.]

MERS as straw man lacks standing to foreclose, but so does the original lender, although it was a signatory to the deal. The lender lacks standing because title had to pass to the secured parties for the arrangement to legally qualify as a "security." The lender has been paid in full and has no further legal interest in the claim. Only the securities holders have skin in the game; but they have no standing to foreclose, because they were not signatories to the original agreement. They cannot satisfy the basic requirement of contract law that a plaintiff suing on a written contract must produce a signed contract proving he is entitled to relief.

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.
Following the Boyko decision, in December 2007 attorney Sean Olender suggested in an article in The San Francisco Chronicle that the real reason for the bailout schemes being proposed by then-Treasury Secretary Henry Paulson was not to keep strapped borrowers in their homes so much as to stave off a spate of lawsuits against the banks. Olender wrote:

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.

Needless to say, however, the banks did not buy back their toxic waste, and no bank officials went to jail. As Olender predicted, in the fall of 2008, massive taxpayer-funded bailouts of Fannie and Freddie were pushed through by Henry Paulson, whose former firm Goldman Sachs was an active player in creating CDOs when he was at its helm as CEO. Paulson also hastily engineered the $85 billion bailout of insurer American International Group (AIG), a major counterparty to Goldmans' massive holdings of CDOs. The insolvency of AIG was a huge crisis for Goldman, and Goldman was the largest recipient of public funds from the AIG bailout.
In a December 2007 New York Times article titled "The Long and Short of It at Goldman Sachs," Ben Stein wrote:

For decades now ... I have been receiving letters [warning] me about the dangers of a secret government running the world ... [T]he closest I have recently seen to such a world-running body would have to be a certain large investment bank, whose alums are routinely Treasury secretaries, high advisers to presidents, and occasionally a governor or United States senator.

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.

[*T*]

Re: Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

In itself it's not just, but it rights a bigger injustice.
I would laugh so hard if those MBS were found fraudulent.

[Tybee Island]

Re: Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

This is timely. I was following several large foreclosures last Winter and all of the actions were brought to foreclosure by MERS for a unit of Lehman Brothers real estate lending group.

I remember reviewing all of the deeds and transfers and inspecting title and kept coming up with the same conclusions, there was no legal standing for MERS to bring the action and the defects in the chain of title were stunning.

I think the chink in the armor for the financial oligarchy is that they may have successfully captured congress, but they are out in the rain when it comes to the courts.

Moreover, have the bond holders (foreign and domestic) of these bundled mortgages been defrauded?

[c1ue]

Re: Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

I think Ellen Brown is having a nice fantasy.

If the banks were really interested in the foreclosed properties, then the fight against these types of lawsuits would be much greater.

As it is they are not foreclosing on properties which 'should' be.

Note that this ruling doesn't invalidate the mortgages; there is still no debt forgiveness.

The most likely result is that the Fed will buy up even more mortgages and the banks wind up being made whole.

Of course, according to EJ's source this is already happening via the GSE's.

The cumulative result is again the savers get spanked. Those who overly aggressively bought into the real estate swindle get evened out while those who didn't get taxed via dollar depreciation.

[ThePythonicCow]

Re: Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

There's a thread on this here.

Awesome -- you posted this response an hour before I started this thread ! You're good.

I tried to search for this before posting; must have missed it somehow. Thanks for the cross-link, Chomsky.

[Rajiv]

Re: Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

C1ue,

Think -- What happened in the case of Auction Rate Securities? Which were similarly bundled loans -- when the auctions failed. What are the implications if something similar were to happen in the case of Mortgage Loans

Market Size:
Auction Rate Securities $200B
mortgage backed securities >9000B

The Kansas State Supreme Court has opened a door. Who will walk through it, and will it turn into a floodgate?

[Rajiv]

Re: Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

Don't you think that we should consolidate both threads?

FRED -- opinions?

[c1ue]

Re: Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

Think -- What happened in the case of Auction Rate Securities? Which were similarly bundled loans -- when the auctions failed. What are the implications if something similar were to happen in the case of Mortgage Loans

Rajiv,

From what EJ noted in his latest posting, it seems that the same is happening already: between the Fed's purchases of MBS's and the GSE's loan purchases using government money, it is very conceivable that $1T or $2T dollars has already been spent buying mortgages. In fact, it would not shock me if the amounts bought exceed those numbers.

Assuming this is true, then $9T is only a hop, skip, and a jump away...

The issue isn't that the Fed/GSE's can't buy more given their access to unlimited printed money, it is what this action causes internationally in reaction.

[Rajiv]

Re: Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

Yes I know that that is what is happening right now.

However, until now there was no other legal pathway for anybody other than the Fed and the US Treasury. Now, a small door has been opened -- which may allow other players on the table.

If the courts continue along the road opened by the state of Kansas, then criminal cases can be opened up by state AGs as happened with ARSs

Civil cases can be started by state (nations) and non state players. US is still governed by the rule of law (even though it appears sometimes not to be)

If as was the case with ARSs there is a reasonable chance for charges of fraud and misrepresentation to be proven, then Pandora's Box opens up.

[c1ue]

Re: Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

Rajiv,

I understand where you're coming from.

Until I see someone of significance go to jail though, I will reserve judgement on just how much 'rule of law' there is.

I have not looked closely at this case - but at first glance the assertion is simply one that MERS cannot foreclose since it generally cannot produce even a title - and if it did, that its quasi-legal standin status in lieu of its servicers is insufficient.

Whether the original loans were made in a fraudulent way is a completely different issue. Similarly as I noted before the fact that a loan exists is not in dispute either.

So I'm still somewhat unclear on how this helps. Sure, the homeowner's may not be as easily foreclosed on, but ultimately the banks are getting their money for these loans from the government anyway.

As Dr. Michael Hudson said - the game in town now is to add late fees and interest charges on late payments to the balances of outstanding loans, then to have these loans be bought by GSE's and/or the Fed.

The ultimate owner of the home either way is still going to be the government.

[Slimprofits]

Re: Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

I wonder if the following Kansas ruling, if adopted nationwide, is potentially as significant as Ellen Brown suggests.

http://www.housingwire.com/2009/09/1...e-mers-appeal/

MERS has defended its operations in court. According to the company’s Web site, MERS was successful in getting a class action suit dismissed in 2007 that was filed in US District Court and that questioned the firm’s right to operate. The Second District Court of Appeals of Florida ruled in 2007 that the company has a right to be a party of foreclosure actions in the state. The New York Court of Appeals also ruled in the company’s favor in 2006 in a similar case.

[vinoveri]

Re: Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

The cumulative result is again the savers get spanked. Those who overly aggressively bought into the real estate swindle get evened out while those who didn't get taxed via dollar depreciation.

Right. And the more people wake up to this fact, and the fact that their complaining about it to the politicians won't help, the current and next generations will increasingly be drawn to the casino, lottery, asset speculation meal-ticket, and that saving is a chumps game (which of course we see it is). Leverage, fraud, strategic contract-breaches will become the norm and the society rapidly spiral into banana-land.

Get those banks a-lending Ben and Tim, I'm ready for me an mine to take my turn at privatizing the profits and sociallizing any losses :mad:

[D-Mack]

Re: Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

Mortgage Electronic Registration Systems Loses Legal Shield


...

I don’t quite agree with Ellen Brown, who in an extensive legal analysis of the decision, writes: “The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose.” It may be possible for trustees for the securitized loans to somehow perfect standing, i.e., develop the ability to claim loan ownership (perhaps via a purchase) and then move to foreclose. (Brown also calls it a Kansas Supreme Court decision, but it appears to be the intermediate 3 judge panel of the Court of Appeals that heard the case, not the full Kansas Supreme Court).

But Brown is correct when she states this is a very significant legal development, one that might dramatically impact foreclosure litigation.

This ruling could send the lenders who work with MERS scurrying to resolve this in their favor. Look for a lobbying effort to get some favored congresscritter to pass legislation granting them standing to sue on behalf of loan holders (Congress may be able legislate that legal right, although there are state laws to be contended with).

As foreclosures continue to ramp up, I expect a lot of rhetoric about why we need to stop them (I disagree) and modify mortgages (which have been mostly unsuccessful).

Last, you never know what someother state supreme court might rule. (Any lawyers out there know what is on upcoming dockets involving MERS ?)

Bottom line: It just got a lot harder to foreclose on homes with securitized mortgages in Kansas, and quite probably, the rest of the nation.

http://www.ritholtz.com/blog/2009/09...-legal-shield/

...................

[Rajiv]

Re: Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

A very good site discussing the ins and outs of Mortgage Fraud

Foreclosure Fraud – Guide to Looking Up Public Records for Fraud

Consumer Anger Rising Fast: Chargebacks

From The Market Ticker (Karl Denninger)

Anecdotal report thus far….

On the forum there is a report of a number of merchants dropping credit card processing entirely due to rampant (and bogus) chargebacks.

Does anyone remember my Tickers on “Is The Government a Felon or a Cop“ posts?

Go read ‘em again.

One of the more recent had this to say:

If the people cannot find justice within the government’s apparatus, are they to sit quietly and ask “Please Sir, may I have another (beating, rape, robbery, take your pick)?”
Or should we expect that at some point – perhaps not now, but perhaps not far down the road either, the people will have had enough. They will rise and take care of these matters in their own way – and there won’t be much in the way of a “fair trial.” I’ve yet to see boiled rope or guillotine blade futures listed by the CME, but is this sort of redress for grievances really that far in our future?

It appears that the breakdown of the implied social agreement is beginning to accelerate.

We have people who have lived in their homes for two years now without making a mortgage payment. Banks are refusing to foreclose because it would force them to write off their losses – they are thus lying about their credit quality by enabling people to live in the house literally for free – claiming to be “well-capitalized” while at the same time hiding huge losses in the form of loans they’re refusing to foreclose on.

We have banksters and lobbyists who claimed that the world would end if they had to “mark to the market” – in other words, they demanded legislative permission to lie. They got it, then used their so-called “healthy balance sheets” to pay enormous bonuses to the very same people who peddled these trash-ridden securities to the masses.
The people have had it. They’re fighting back with the same tools the banksters use:

• They’re refusing to pay their mortgages, knowing full well that the banks cannot foreclose on all of the loans without recognizing the losses and rendering themselves insolvent.
• They are filing chargebacks against merchants, whether valid or not, as a means of playing ‘extend and pretend’ on a personal level. Even if they lose, for a while they don’t have to pay (but the merchant does, and has to contest the refused payment.)

I’m sure there’s more coming.

Listen up Washington. You knew back in 2004 that these “mortgage products” were fraudulent. The FBI told you so. In 2006 and 2007 you had studies by private credit analysts and HUD that found that only one “ALT-A” loan in ten had an accurately-stated income.

None of this was disclosed to the buyers of these securities and as a consequence they took monstrous losses – losses that are not done with being taken.

Instead of forcing those who made the bad loans to eat them and prosecuting the wrongdoing involved the government has done the exact opposite – it has rewarded the wrong-doing by bailing out the firms involved instead of forcing them through bankruptcy and closing them down. The people who got hosed by buying securities without disclosure that the loans in them were rife with fraud have been given no effective means of recourse.
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