Archive for October, 2009

In the years immediately preceding the real estate collapse and the larger crash of the US financial service a handful of the players in the subprime industry became more and more aggressive in the loans they were writing.  In order to do so, the lenders lowered their already low borrower qualification guidelines in order to meet their voracious demand for more loans.  If a lender closed $10 million in loans in February, managers wanted $20 million in loans the next month.  The lenders employed sales agents that would travel door to door t the local mortgage brokerage offices to hand out the “term sheets” or criteria a borrower would have to meet in order to qualify for loans in their new programs.  The credit scores began low, than just kept dropping as did the loan to value or the amount the lenders were willing to loan relative to the perceived value of the home.

As the competition and volume heated up, the frenzy of lending turned into an orgy as local mortgage brokers blasted direct mail, phones, radio ads and television, all in an effort to suck in more potential loan leads.  Think back and remember those days, your mail was stuffed with mortgage lending junk mail and you couldn’t turn on a tv, radio or email without being bombarded with the most aggressive solicitations.

The brokers could care less if the borrower had any ability to repay the loan or whether it made any economic sense, all they had to do was sell the loan, then wait for the loan papers to be delivered from the likes of New Century, Countrywide or Argent, get the borrower to sign and wait for a big fat commision check.  New Century, Countrywide and Argent could care less if the borrower could repay the loan because before the borrower’s ink was dry on the paper, they had sold the loan to Bear Stearns, Merrill Lynch or Deutsche Bank (after they shaved off their commissions) and these Wall Street firms could care less about whether the loan would be repaid because they had already sold the loans off to investment sources like teacher, police and fireman’s unions and other major investment sources.

These end purchasers of this bad debt should have cared about the legitimacy of the underlying debt they were borrowing, but the fund managers were intoxicated by the massive fees they were collecting and they too ignored the common sense impossiblity of the loans they were purchasing. (How could a teacher making $30,000 ever afford a $300,000 mortgage.)

It was all basic math that a fifth grader could have figured out, but the math and the peril it was causing was ignored because the money being made by all the players was far too great.  Now given the massive cost to taxpayers, the financial system and the security of the United States of America, you would think government officials would have stepped in to avert this crisis that developed in slow motion, right in front of everyone’s eyes over a ten year period.  Again, this was basic math.  The volume of loan obligations for the average American grew exponentially, while incomes were stagnant or declining.

The problem with government intervention is officials at all levels, begining with the President of the United States, were corrupted, short sited and afraid to act.  This was not a Bush vs. Clinton issue.  The crisis ramped up during Clinton (actually it accelerated during Bush 1), and it hit it’s peak during Bush II.  Quite simply, when all other sectors of the US economy were down and declining, the Federal Government was loathe to turn the spigot off on the only sector of the economy that was producing jobs and income….a short-sighted reaction to the crisis to be sure.

The major players in this market are now all bankrupt, but the officials and employees who profited so handsomely are living large on the piles of money they made during this decades long debacle.  Have a look at some of the numbers:

Ameriquest Mortgage

In 2001 Ameriquest funded $6 billion in subprime loans, 28 percent were stated income loans.  In other words, Ameriquest had $1.7 million of their money out on the streets in mortgages with incomes and other factors that were not verified.  By 2003, Ameriquest was originating $40 billion a year and 30% or $12 billion of those loans were stated mortgages.  In January 2006 Ameriquest entered into a settlement with Attorneys General for several states, and agreed to pay $325 million to settle charges that it engaged in abusive lending practices. Argent Mortgage was the sister wholesale lending branch and between the two, and by 2005 they were the number one sub prime lender in the United States, funding almost $75 billion in subprime loans.

New Century Mortgage

In 1996, New Century Mortgage funded or originated  $357 milliion in subprime loans.  The following year its loan volume increased more than fivefold to nearly $2 billion dollars.  In 2004 New Century raised almost $1 billion in a REIT offering.  By 2006, it did business with up to 47,000 mortgage brokers scattered  around the country with a retail network of 222 branch offices.  In late 2005 New Century reported its most profitable year ever, $400 million in profit on $56 billion in loan volume.  When earnings were reported in 2006, investigators became suspicious of several accounting issues and on April 2, 2007, New Century filed for bankruptcy and immediately fired 3,200 people.

The information contained in this blog is taken directly from “Chain of Blame”, http://www.chainofblame.com/a fascinating commentary on the meltdown of the American financial system which was named one of the ten best business books of the year by Bloomberg News. http://www.bloomberg.com/apps/news?pid=20601088&sid=am5wffhiJV9c

Understanding the larger issues that caused the meltdown is key to resolving foreclosure cases for individual consumers.  Knowing what role your lender or servicer played in the crisis is a key component to understanding what kind of relief is available in your foreclosure case. For more information visit my website at www.mattweidnerlaw.com

On August 17, 2009, The Florida Supreme Court Residential Mortgage Foreclosure Task Force published its Final Report.  The report, the full text of which can be found at http://www.dailybusinessreview.com/images/news_photos/56852/MASTERDRAFTAug14.pdf offers a blistering commentary on many of the fraudulent, unethical and illegal tactics being employed by lenders and Plaintiffs firms who are pursuing foreclosure cases on behalf of lenders.  Contrary to some misconceptions and incorrect characterizations made of the profession, attorneys are officers of the Court and they are not permitted to make false or misleading misrepresentations to the Court.  A lawyer cannot make untrue statements and he cannot knowingly permit his client to make misrepresentations.  An attorney that does so faces potential sanctions including suspension and fines.

Because of this well understood principle, it has been shocking for me to experience first hand a pattern and practice of attorney behavior that violates the “Thou Attorney Shall Not Lie” principle and many other important ethical and legal rules that govern the profession.  Bottom line is I’ve personally caught attorneys and firms engaging in outright lying and perpetrating fraud on the courts by filing cases and submitting evidence that is false or misleading.  Believe it or not, attorneys practicing in other areas of the law, even family law and criminal law, will tell you that they’ve been practicing for years and are not aware of other attorneys engaging in patterns of willfully misleading and unethical practice.

The Supreme Court report cited above acknowledges that the fraudulent, unethical and illegal conduct in foreclosure cases is occurring on a wide spread basis.  Local judges who hear these cases know that many of the thousands of files contain false and misleading information.   While the report details a wide range of improper conduct, and specifically identifies many of the firms who are engaging in this conduct, it fails to provide clear guidance on what will be done to put an end to these practices. (An excellent report that details the pattern of fradulent practices can be found here at http://www.heraldtribune.com/article/20090929/COLUMNIST/909291036)

After reviewing the report and based on my personal experiences in foreclosure cases, I submitted comments to the Florida Supreme Court urging stronger action to curb abusive Plaintiff practices.  The primary focus of my comments was to protect the consumers I represent everyday, but the larger purpose is a greater respect for the court system and the financial system as a whole.  I’m pleased to report that my comments were one of only 39 comments that were published by the Task Force in its Final Report and Recommendations.

The bottom line is the country got in this mess because the entire mortgage industry became infected with fraud, lies and misrepresentations on a massive scale.  The same behaviors that got us all into this mess are now being perpetrated on our court systems and in the long run they are going to cause similar disastrous consequences.

The problems that are being created in courtrooms today when judges grant foreclosure to Plaintiffs based on improper and incorrect evidence are eventually going to bankrupt the title insurance industry.

A similar situation occurred shortly after the Great Depression, and this collapse led to the creation of the current land title insurance system.  The reserves of the major title insurers are shrinking as fewer new “clean” closings are occurring and the bulk of new policies are being written on new “dirty” foreclosure and short sale cases.  We can all only hope that the judges who are controlling this current phase of the crisis will recognize the long-term impact of these practices and stop them in their tracks!

If you have questions regarding foreclosure, real estate or the law, contact Matt Weidner at www.mattweidnerlaw.com

The information contained in this blog is taken directly from “Chain of Blame”, http://www.chainofblame.com/a fascinating commentary on the meltdown of the American financial system which was named one of the ten best business books of the year by Bloomberg News. http://www.bloomberg.com/apps/news?pid=20601088&sid=am5wffhiJV9c

The current meltdown of the American economy began in Southern California in the late 1980’s. Southern California remained the epicenter of the meltdown in 2006 when eight of the nation’s top 15 subprime firms were headquarted in Southern California.  Seven of the 15 that survived were nonbanks that survived on wharehouse lines of credit from Bear Stearns, Credit Suisse, Lehman Brothers and Merrill Lynch.  After Savings and Loans crashed, a variety of mortgage brokerage firms sprung up to fill the void in lending left from the S& L crash.  Countrywide Home Loans began as a tiny player in the residential lending market but by 1991 Countrywide was the largest lender in the United States.

When the S & Ls failed, Countrywide and other mortgage lenders stepped in to pick up the pieces.  In 1991 there were 14,000 brokerage firms in existence.  By the end of 2006 there were 53,000 loan brokerage firms operating in 50 states, employing an estimated 200,000 people. By comparison, the Mortgage Bankers Association (vestiges of the old S & L’s) had just 2,300 members.

Between 2004 and 2007 Countrywide had originated $150 billion in subprime loans in the US and in 2006 alone, Countrywide was the largest option ARM lender in the country, originating $11 billion each quarter.  There were 44,000 brokers in the US and 38,000 were approved and signed up to do business with Countrywide.  Countrywide was focused on churning a massive volume of loans, without regard to the quality of the loan or the borrower—the fees were being made when the loans were closed and sold.

The Time Before SubPrime

For well over 50 years, savings and loans financed most homes purchased by Americans.  Non-bank mortgage lenders like Countrywide were limited to making FHA/VA loans which had higher delinquency rates than the loans written by the Savings and Loans, but because the delinquent loans were underwritten by the US government, the risk to lenders like Countrywide was relatively low.

In the early eighties a powerful alliance was created between the National Association of Home Builders, the National Association of Realtors, Fannie Mae, Freddie Mac, and the National Mortgage Bankers Association.  These groups pushed for deregulation at the state and federal level of the Savings and Loan industry.  When the regulations fell, the S&L started an orgy of irresponsible and sometimes outright fraudulent lending.  The resulting collapse of the S& L’s cost American taxpayers more than $150 billion.

In Steps Countrywide

In 1981 before most S&L’s failed, Countrywide raised $3 million in an IPO.  After mass failures in 1983 Wall Street titans had nowhere to go with their money and Bear Stearns sold $11 million in Countrywide preferred stock.  The Money Store, Beneficial, Associates First Capital and Aames Financial and Household Finance were all involved in making small second mortgage loans in the 1980s.  There numbers were tiny, but the percentage yield (in the neighborhood of 14%) on those loans was tantalizing.  Wall Street briefly got into the game of funding these pools of loans in 1996-1998, but the market shut down and the money disappeared for these types of loans during the Russian debt crisis of 1998.  (While these rates in general were high it is important to keep in mind that when Reagan took office in 1981 mortgage rates were in nosebleed territory—14%, a year later the rate would rise to 16%.)  Other larger lenders (Like Countrywide) eventually took notice of the yield on these riskier loans and between the early nineties and the crash, the existing lenders and hundreds of others began creating business models based on the larger yields of riskier loans.

Between 2002 and July 2007, home lenders had originated $2.6 trillion in mortgages to people with bad credit but loan delinquencies were rising to 20 year highs.

The Role of Wall Street

The biggest names on Wall Street, Citigroup, Lehman Brothers, Merrill Lynch, Credit Suisse, Bear Stearns, were all making massive amounts of money trading on subprime mortgages.  It seems counter-intuitive that big firms would make more money on “bad” mortgages, but the higher interest rates on those mortgages commanded higher fees…..for every player in the game.  From the broker who sold the loan to the homeowner, to the Bear Stearns manager that sold the pool….the worse the credit, the higher the risk of the loan, the more money there was to be made.  A consumer loan broker could make three or four thousand dollars on a $100,000 loan, but a bond salesman from a Wall Street brokerage house could make $62,500 on a $50million bond.

As the 1990s progressed, Countrywide and other lenders grew rapidly.  Concurrent with this growth, Wall Street firms like Bear Stearns, Lehman Brothers and Merrill Lynch grew rapidly and were making massive profits.  The subprime lenders could not close and fund the volume of loans they were writing—they simply didn’t have that kind of cash. The lenders closed billions of dollars in loans a month.  These loans were bundled into Mortgage Backed Securities, which were sold to the Wall Street firms who in turn replenished the lender’s capital so the cycle of loan making could continue. The Wall Street firms took a massive commission on the Mortgage Backed Securities when they sold them to investment outlets like Police, Fire and Teachers union pension funds.  The Mortgage Backed Securities were not just sold to U.S.-based investment outlets, but to unions and the like all over the world.

In 2000 Wall Street firms had securitized $74 billion in subprime loans or just 7 percent of all loans originated that year.  Two years later that figure had more than tripled to $233 billion.

The Fall of Countrywide (and the crash of the subprime industry)

In a conference call to investors on July 24, 2007, Angelo Mozillo said, “We are experiencing a huge price depression, one we have not seen before….not since the Great Depression.”  The next day, Countrywide stock dropped 11% and the stock market dropped 226 points.  Despite the fact that Countrywide had made $2 billion the year before, his comment was the concrete indicator that something was wrong in Countrywide (and the subprime industry as a whole) and neither ever recovered.

Bank of America Purchases Countrywide

With Countrywide in trouble, a bailout was absolutely necessary and Bank of America became the only real suitor.  After analyzing the purchase however, an independent research firm (Friedman Billings Ramsey) predicted that Bank of America would have to write down the value of Countrywide ‘s Mortgage Holdings by up to $30 billion because of delinquencies and defaults.

On January 11, 2008, Bank of America announced that it planned to purchase Countrywide Financial for $4.1 billion in stock. On June 5, 2008, Bank of America Corporation announced it had received approval from the Board of Governors of the Federal Reserve System to purchase Countrywide Financial Corporation. On June 25, 2008, Countrywide announced it had received the approval of 69% of its shareholders to planned merger with Bank of America. On July 1, 2008, Bank of America Corporation completed its purchase of Countrywide Financial Corporation.

The following is a mind-blowing excerpt from today’s Wall Street Journal entitled, “Household Debt Can Hasten Recovery, When It Goes Unpaid”  the full text of the article can be found here http://online.wsj.com/article/SB125651175580806989.html

The Federal Reserve puts US household debt, including mortgage debt, at about $137 trillion or 125% of annual aftertax income.  Experts believe this number will reduce to a more sustainable level of 100% over the next several years as consumers “deleverage” or just stop paying those debt obligations.  Some economists argue that such deleveraging is actually good for the larger economy…because it forces those holding the debt to write off the bad debts, and lets the consumer get right back out there spending and borrowing.  Yipee!

First American Core Logic, which tracks the performance of home loans estimates that 9.3% of the nationsl 52.4 million mortgages are 60 or more days bebind, a figure that represents $1.2 trillion in loans.  By this logic, this high default number isn’t all that bad because when consumers walk away from this debt, the lenders will be forced to absorb the losses, then consumer lending and spending will start back up and we’ll all be in great financial shape in no time.

But wait, a larger problem facing the entire country is the fact that by current estimates, US government debt could reach 85% of annual economic output by 2014, up from about 58% now. 

HOLY SMOKES, just let that sink in for a minute…..US debt at 85% of annual output!

In a July 2009 report, the United States Government Accounting Office (GAO) issued an analysis and report detailing problems with the Home Affordable Modification Program, a program operated by the Department of Treasury under the Troubled Asset Relief Program (TARP), the HAMP program represents the US government’s primary response to the residential mortgage crisis.  The program is an abysmal failure and will continue to be so for the foreeable future.

The full text of the report can be found here at http://www.tarptales.org/files/reports/GAO%20-%20d09837.pdf The report is  a real hoot of a read because it details how $50 billion dollars of taxpayer money is being tossed around to the very companies that caused all this mess in the first place with little or no control over the money or how that money will be spent or accounted for.  The 68 page report is a case study in government incompetence and private industry opportunisim.  Rather that bother with all the details, just read the conclusion found at the end of the report which sums up the problems with the program:

Our analysis found weaknesses with the design and monitoring plans for the counseling feature of the first-lien modification program and the rationale for the HPDP program and with Treasury’s estimate of the number of borrowers that might be helped under the first-lien modification program. Furthermore, we identified weaknesses with HAMP’s management infrastructure and found that the development of some processes and internal controls was behind schedule.

Finally, we are concerned that Treasury is not fully vetting servicers with which they contract to make modifications. One of Treasury’s stated goals is to complete initial modifications quickly. But, unlike other TARP programs, such as the Capital Purchase Program, HAMP expenditures—which are projected to be up to $50 billion—are not investments that will be partially or fully repaid but expenditures that, once made, will not be recouped.

In plain language, the report admits US taxpayers are pumping billions of dollars to the mortgage lenders that caused the problems with residential real estate with no way to manage or account for that money.

Who benefits from the 50 billion in taxpayer dollars?

As of July 14, 2009, 27 servicers had executed HAMP servicer participation agreements with Fannie Mae, the HAMP
administrator. Almost $19 billion of the TARP funds had been obligated to these servicers as of July 14, 2009 (The list is a who’s who of the lenders that caused this mess in  the first place.)

Do normal citizens benefit from the program?

According to Treasury, participating servicers report that as of July 20, 2009 they had extended over 354,115 trial modification offers to borrowers and 180,305 trial modifications had begun. (So of the millons of homeowners in trouble, less than 200,000 have actually recieved benefits from the $50 billion taxpayers are pumping into the program.)

How many homeowners are in trouble that could/should be helped?

Using a variety of data sources constituting roughly 50.3  million loans nationwide, program officials project over
10 million borrowers (meet the qualifying terms in the HAMP guidelines and) are likely at risk of default/foreclosure. (S0 10 million are in trouble and 200,000 have been offered any assistance.)

Using limited data on these borrowers’  current debt-to-income ratios, Treasury projects about 80 percent
(8.4 million) of these borrowers have debt-to-income ratios greater than 31 percent, and thus are likely to have
unaffordable loans. (That’s 8.4 million homes that can’t be saved under this, the only government program.)

Using information from their simplified net present value (NPV) test model to determine borrowers whose loans
would benefit from modification, Treasury projects about 70 percent (3.9 million) of these borrowers would likely pass the test and be offered the 90-day loan modification trial.  (Don’t quite get the GAO math, but sounds like 3.9 million might benefit from some program…problem is, by their own numbers they have not been offered assistance.)

(Keep in mind that both the estimates provided above do not take into account the dramatic increase in unemployment which likely were not factored into those estimates.)

The US Government is going to toss out billions of dollars to servicers, but we know they’re in absolute chaos and turmoil and unable to handle their existing work, much less the work invovlved in restructuring loans.

Servicers are required to fulfill extensive program requirements, which for some servicers will necessitate increasing staffing and updating data collection systems.  However, Treasury and its financial agents are not consistently assessing the ability of prospective HAMP servicers to meet distinct HAMP requirements and guidelines during the program admittance process. In November 2008, the federal banking regulators stated that banking organizations needed to ensure that their servicers were sufficiently funded and staffed to work with borrowers to avoid
preventable foreclosures while implementing effective risk mitigation measures. However, in its March 2009 report, COP noted that servicers were generally understaffed, lacked the capacity to handle the pre-HAMP demand for loan workout requests, and had no apparent ability to handle a greater volume of loan modifications, such as that expected to be generated under HAMP.

Virtually every one of my customers who has attempted to obtain a modification has reported they cannot get any information out of their lender or servicer.  They mail or fax info many times, but this information is lost and must be resent.  Even when it is recieved, the lender or servicer cannot make a decision.  The GAO report confirms that the reason for this is gross incompetence and complete inability of the lenders to handle the task of modification…..billions of your money gone to waste.

One of the most interesting aspects of the mortgage crisis sweeping the country.  Is the fact tath many of the lenders that are pursuing these cases may not have the legal capacity to pursue the case because they may not have legal ownership of the underlying mortgage obligation.

The explanation for this lack of ownership rests in the fact that many of the mortgages that are being foreclosed on have been packaged and sold (in some cases many times) to a variety of other sources. This fact presents many complicated problems, including the fact that it is impossible to determine exactly who is owed the money secured by that mortgage.  This process, known as “Securitization” is described in an article below…the implications are staggering for the entire financial system…..The full text of the article can be found here http://www.counterpunch.org/martens10212009.html

The Next Financial Crisis Hits Wall Street, as Judges Start Nixing Foreclosures

By PAM MARTENS

The financial tsunami unleashed by Wall Street’s esurient alchemy of spinning toxic home mortgages into triple-A bonds, a process known as securitization, has set off its second round of financial tremors.

After leaving mortgage investors, bank shareholders, and pension fiduciaries awash in losses and a large chunk of Wall Street feeding at the public trough, the full threat of this vast securitization machine and its unseen masters who push the levers behind a tightly drawn curtain is playing out in courtrooms across America.

Three plain talking judges, in state courts in Massachusetts and Kansas, and a Federal Court in Ohio, have drilled down to the “straw man” aspect of securitization. The judges’ decisions have raised serious questions as to the legality of hundreds of thousands of foreclosures that have transpired as well as the legal standing of the subsequent purchasers of those homes, who are more and more frequently the Wall Street banks themselves.

Adding to the chaos, the Financial Accounting Standards Board (FASB) has made rule changes that will force hundreds of billions of dollars of these securitizations back onto the Wall Street banks balance sheets, necessitating the need to raise capital just as the unseemly courtroom dramas are playing out.

The problems grew out of the steps required to structure a mortgage securitization. In order to meet the test of an arm’s length transaction, pass muster with regulators, conform to accounting rules and to qualify as an actual sale of the securities in order to be removed from the bank’s balance sheet, the mortgages get transferred a number of times before being sold to investors. Typically, the original lender (or a sponsor who has purchased the mortgages in the secondary market) will transfer the mortgages to a limited purpose entity called a depositor. The depositor will then transfer the mortgages to a trust which sells certificates to investors based on the various risk-rated tranches of the mortgage pool. (Theoretically, the lower rated tranches were to absorb the losses of defaults first with the top triple-A tiers being safe. In reality, many of the triple-A tiers have received ratings downgrades along with all the other tranches.)

Because of the expense, time and paperwork it would take to record each of the assignments of the thousands of mortgages in each securitization, Wall Street firms decided to just issue blank mortgage assignments all along the channel of transfers, skipping the actual physical recording of the mortgage at the county registry of deeds.

Astonishingly, representatives for the trusts have been foreclosing on homes across the country, evicting the families, then auctioning the homes, without a proper paper trail on the mortgage assignments or proof that they had legal standing. In some cases, the courts have allowed the representatives to foreclose and evict despite their admission that the original mortgage note is lost. (This raises the question as to whether these mortgage notes are really lost or might have been fraudulently used in multiple securitizations, a concern raised by some Wall Street veterans.)

But, at last, some astute judges have done more than take a cursory look and render a shrug. In a decision handed down on October 14, 2009, Judge Keith Long of the Massachusetts Land Court wrote:

“The blank mortgage assignments they possessed transferred nothing…in Massachusetts, a mortgage is a conveyance of land. Nothing is conveyed unless and until it is validly conveyed. The various agreements between the securitization entities stating that each had a right to an assignment of the mortgage are not themselves an assignment and they are certainly not in recordable form…The issues in this case are not merely problems with paperwork or a matter of dotting i’s and crossing t’s. Instead, they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts legislature. To accept the plaintiffs’ arguments is to allow them to take someone’s home without any demonstrable right to do so, based upon the assumption that they ultimately will be able to show that they have that right and the further assumption that potential bidders will be undeterred by the lack of a demonstrable legal foundation for the sale and will nonetheless bid full value in the expectation that that foundation will ultimately be produced, even if it takes a year or more. The law recognizes the troubling nature of these assumptions, the harm caused if those assumptions prove erroneous, and commands otherwise.” [Italic emphasis in original.] (U.S. Bank National Association v. Ibanez/Wells Fargo v. Larace)

A month and a half before, on August 28, 2009, Judge Eric S. Rosen of the Kansas Supreme Court took an intensive look at a “straw man” some Wall Street firms had set up to handle the dirty work of foreclosure and serve as the “nominee” as the mortgages flipped between the various entities. Called MERS (Mortgage Electronic Registration Systems, Inc.) it’s a bankruptcy-remote subsidiary of MERSCORP, which in turn is owned by units of Citigroup, JPMorgan Chase, Bank of America, the Mortgage Bankers Association and assorted mortgage and title companies. According to the MERSCORP web site, these “shareholders played a critical role in the development of MERS. Through their capital support, MERS was able to fund expenses related to development and initial start-up.”

In recent years, MERS has become less of an electronic registration system and more of a serial defendant in courts across the land. In a May 2009 document titled “The Building Blocks of MERS,” the company concedes that “Recently there has been a wave of lawsuits filed by homeowners facing foreclosure which challenge MERS standing…” and then proceeds over the next 30 pages to describe the lawsuits state by state, putting a decidedly optimistic spin on the situation.

MERS doesn’t have a big roster of employees or lawyers running around the country foreclosing and defending itself in lawsuits. It simply deputizes employees of the banks and mortgage companies that use it as a nominee. It calls these deputies a “certifying officer.” Here’s how they explain this on their web site: “A certifying officer is an officer of the Member [mortgage company or bank] who is appointed a MERS officer by the Corporate Secretary of MERS by the issuance of a MERS Corporate Resolution. The Resolution authorizes the certifying officer to execute documents as a MERS officer.”

Kansas Supreme Court Judge Rosen wasn’t buying MERS’ story. In fact, Wall Street was probably not too happy to land before Judge Rosen. In January 2002, Judge Rosen had received the Martin Luther King “Living the Dream” Humanitarian Award; he previously served as Associate General Counsel for the Kansas Securities Commissioner, and as Assistant District Attorney in Shawnee County, Kansas. Judge Rosen wrote:

“The relationship that MERS has to Sovereign [Bank] is more akin to that of a straw man than to a party possessing all the rights given a buyer… What meaning is this court to attach to MERS’s designation as nominee for Millennia [Mortgage Corp.]? The parties appear to have defined the word in much the same way that the blind men of Indian legend described an elephant — their description depended on which part they were touching at any given time. Counsel for Sovereign stated to the trial court that MERS holds the mortgage ‘in street name, if you will, and our client the bank and other banks transfer these mortgages and rely on MERS to provide them with notice of foreclosures and what not.’ ” (Landmark National Bank v. Boyd A. Kesler)

Lawyers for homeowners see a darker agenda to MERS. Timothy McCandless, a California lawyer, wrote on his blog as follows:

“…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. While up against the wall of foreclosure, consumers that try to assert predatory lending defenses are often forced to join the party — usually an investment trust — that actually will benefit from the foreclosure. As a simple matter of logistics this can be difficult, since the investment trust is even more faceless and seemingly innocent than MERS itself. The investment trust has no customer service personnel and has probably not even retained counsel. Inquiries to the trustee — if it can be identified — are typically referred to the servicer, who will then direct counsel back to MERS. This pattern of non-response gives the securitization conduit significant leverage in forcing consumers out of their homes. The prospect of waging a protracted discovery battle with all of these well funded parties in hopes of uncovering evidence of predatory lending can be too daunting even for those victims who know such evidence exists. 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.”

One of the first judges to hand Wall Street a serious slap down was Christopher A. Boyko of U.S. District Court in the Northern District of Ohio. In an opinion dated October 31, 2007, Judge Boyko dismissed 14 foreclosures that had been brought on behalf of investors in securitizations. Judge Boyko delivered the following harsh rebuke in a footnote:

“Plaintiff’s ‘Judge, you just don’t understand how things work,’ argument reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process…There is no doubt every decision made by a financial institution in the foreclosure is driven by money. And the legal work which flows from winning the financial institution’s favor is highly lucrative. There is nothing improper or wrong with financial institutions or law firms making a profit – to the contrary, they should be rewarded for sound business and legal practices. However, unchallenged by underfinanced opponents, the institutions worry less about jurisdictional requirements and more about maximizing returns. Unlike the focus of financial institutions, the federal courts must act as gatekeepers…” (In Re Foreclosure Cases)

While the illegal foreclosure filings, investor lawsuits over securitization improprieties, and predatory lending challenges play out in courts across the country, a few sentences buried deep in Citigroup’s 10Q filing for the quarter ended June 30, 2009 signals that we’ve seen merely a few warts on the head of the securitization monster thus far and the massive torso remains well hidden in murky water.

Citigroup tells us that the Financial Accounting Standards Board (FASB) has issued a new rule, SFAS No. 166, and this is going to have a significant impact on Citigroup’s Consolidated Financial Statements “as the Company will lose sales treatment for certain assets previously sold to QSPEs [Qualifying Special Purpose Entities], as well as for certain future sales, and for certain transfers of portions of assets that do not meet the definition of participating interests. Just when might we expect this new land mine to go off? “SFAS 166 is effective for fiscal years that begin after November 15, 2009.” There’s more bad news. The FASB has also issued SFAS 167 and, long story short, more of those off balance sheet assets are going to move back onto Citi’s books.

Bottom line says Citi:

“… the cumulative effect of adopting these new accounting standards as of January 1, 2010, based on financial information as of June 30, 2009, would result in an estimated aggregate after-tax charge to Retained earnings of approximately $8.3 billion, reflecting the net effect of an overall pretax charge to Retained earnings (primarily relating to the establishment of loan loss reserves and the reversal of residual interests held) of approximately $13.3 billion and the recognition of related deferred tax assets amounting to approximately $5.0 billion….” [Emphasis in original.]

I’m trying to imagine how the American taxpayer is going to be asked to put more money into Citigroup as it continues to bleed into infinity.

Citigroup is far from alone in financial hits that will be coming from the Qualifying Special Purpose Entities. Regulators are receiving letters from Citigroup and other Wall Street firms pressing hard to rethink when this change will take effect.

Putting aside for the moment the massive predatory lending frauds bundled into mortgage securitizations, inadequate debate has occurred on whether securitization of home mortgages (other than those of government sponsored enterprises) should be resuscitated or allowed to die a welcome death. If we understand the true function of Wall Street, to efficiently allocate capital, the answer must be a resounding no to this racket.

Trillions of dollars of bundled home mortgage loans and derivative side bets tied to those loans were being manufactured by Wall Street without any one asking the basic question: why is all this capital being invested in a dormant structure? Houses don’t think and innovate. Houses don’t spawn new technologies, patents, new industries. Houses don’t create the jobs of tomorrow.

Also, by acting as wholesale lenders to the unscrupulous mortgage firms (some in house at Wall Street firms), Wall Street was not responding to legitimate consumer demand, it was creating an artificial demand simply to create mortgage product to feed its securitization machine and generate big fees for itself. Now we see the aftermath of that inefficient allocation of capital: a massive glut of condos and homes pulling down asset prices in neighborhoods as well as in those ill-conceived securitizations whose triple-A ratings have been downgraded to junk.

There’s no doubt that one of the contributing factors to the depression of the 30s and the intractable unemployment today stem from a massive misallocation of capital to both bad ideas and fraud. Today’s Wall Street, it turns out, is just another straw man for a rigged wealth transfer system.

Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article other than that which the U.S. Treasury has thrust upon her and fellow Americans involuntarily through TARP. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com