Kansas Supremes: MERS Lacks Standing to Foreclose

As described in this article from the New York Times, the Kansas Supreme Court has just held that MERS, the so-called "nominee" for a large number of mortgages, has no standing to bring a foreclosure complaint.

MERS stands for "Mortgage Electronic Registration System." It is a private company, created to help facilitate the transfer and tracking of mortgages between purchasing entities without requiring the seller or purchaser to record an assignment in local public records, or, presumably, to pay document stamp taxes. MERS, as nominee or sometimes as actual owner, could be listed in public records as the owner and holder of the note and mortgage, while the mortgage could be sold many times, with MERS continuing to "serve" as "nominee." 
 During the years when mortgages were traded frequently and broadly, MERS was seen by many lenders as an essential component of the system.  The article calculates that the lending industry believes that MERS saved approximately $1 billion during the previous decade.

“MERS is basically an electronic phone book for mortgages,” said Kevin Byers, an expert on mortgage securities and a principal at Parkside Associates, a consulting firm in Atlanta. “To call this electronic registry a creditor in foreclosure and bankruptcy actions is legal pretzel logic, nothing more than an artifice constructed to save time, money and paperwork.”

The Kansas ruling arises from a 2006 bankruptcy case in which a second mortgage, registered in MERS name, but actually transferred to Sovereign Bank, with no assignment to Sovereign recorded in the county in which the property is located. When the first mortgagee obtained relief from stay and foreclosed, Sovereign was omitted from the foreclosure and not paid when the property was sold. The case arose from Sovereign's motion to set the foreclosure sale aside, asserting that MERS had no notice of the sale.

The trial court

was unsympathetic. In January 2007, it found that Sovereign’s failure to register its interest with the county clerk barred it from asserting rights to the mortgage after the judgment had been entered. The court also said that even though MERS was named as mortgagee on the second loan, it didn’t have an interest in the underlying property.

Ultimately, the Kansas Supreme Court upheld the trial court's ruling. Although not binding outside Kansas, the holding could be persuasive to courts in other jurisdictions.

“It’s as if there is this massive edifice of pretense with respect to how mortgage loans have been recorded all across the country and that edifice is creaking and groaning,” said Christopher L. Peterson, a law professor at the University of Utah. “If courts are willing to say MERS doesn’t have any ownership interest in mortgage loans, that may eventually call into question the priority of liens recorded in MERS’s name, and there are millions and millions of them.”

Mortgage, Foreclosure "Rescue" Fraud Rampant

Florida Attorney General Bill McCollum addressed the Central Florida Bankruptcy Law Association last Friday at their annual seminar. He noted that Florida is the second highest foreclosure state in the U.S. (after Nevada), and the second highest mortgage fraud state (after California). Not only was there near-record fraud in the making of the mortgages, but now the current schemes center around so-called "foreclosure defense."

Mr. McCollum told CFBLA members that the AG's office is currently prosecuting about 40 criminal mortgage fraud cases, some 40 civil mortgage fraud cases, looking into a further 80 cases where mortgage fraud is suspected, and another some 80 cases of interest where the AG is interested in the initial facts.

McCollum pointed out that pursuant to Florida law, in particular, §501.1377, foreclosure defense firms are prohibited from accepting any payment in advance, no matter what form that payment takes. McCollum said that Florida Courts are interpreting the section broadly, and that even so called "forensic" mortgage services fall under the same rule. So, homeowners should not agree to pay any of these services up front, until a modification has been obtained.

If you are a homeowner facing the possibility of foreclosure, your best bet is to attempt to workout a modification with your lender, and if that fails, contact an attorney. If you cannot afford a private attorney, you can contact legal aid or the Orange County Bar Association for help.

Sowell: Politicians at Heart of Housing Boom (and bust)

This article about Thomas Sowell's new book analyzing the housing boom reveals some interesting points about the genesis of the housing meltdown. In particular, Sowell points to land-use restrictions in high-profile areas like San Francisco as having created artificially high property values in those areas.  This, Sowell claims, led to a surge in news reports about the rising prices for housing in those areas, even where property values were very affordable in other areas of the country. Congress over-reacted to this "false crisis" by juicing the Community Re-investment Act and forcing banks to make big loans to folks who couldn't afford them. Because the sub-prime loans featured high interest rates, the banks stood to make money if the borrowers could pay, and were protected if borrowers defaulted because Congress had ordered Fannie and Freddie to buy up loans made to low-income borrowers. 

In the story's final paragraph, Sowell identifies those he feels are the 'real' victims: taxpayers and homeowners locked into hopelessly oversold mortgages. The banks and mortgage investors are not in Sowells' list, because they have the political power to help themselves -- as shown by the recent TARP bailout (the largest in history). Individuals can help themselves, but they must engage a good lawyer who understands the issues to stand up for them.  Note that I said 'lawyer' and not 'foreclosure defense firm.'  The so-called foreclosure defense outfits have no legal power and generally exist only to part unfortunate homeowners from their money.

Senator Chris Dodd: Obama Foreclosure Plan "Disgraceful"

A fresh Politico article (click here) has a great rundown of the current problems with the foreclosure disaster. It echoes basically what I've been saying, but for those new to the site I'll go through the article and review the parts summarizing the main problems. The juiciest quote from the article is from Senator Chris Dodd:

“Everybody understands that getting out of this broader crisis requires that we stabilize our housing market and stem the tide of foreclosures,” Senate Banking Chairman Chris Dodd (D-Conn.) said in a hearing Thursday. But in harsh wordsfor a Democrat, Dodd said that the Obama administration’s progress in stopping foreclosures has been “disgraceful” so far.

While I agree that the HAMP plan is disgraceful, it is pretty rich for Dodd to point the finger at the administration, when Congress itself rejected the bill that would have allowed bankruptcy judges to modify mortgages. After all, there is a limit to what the White House can do by executive order. First of all, the White House has no direct authority over private entities such as the lenders, servicers, and trusts holding the notes and mortgages that need to be modified. Second, the Constitution protects the right of contract, and prevents the White House from ordering anyone to give up all or part of their interest in a contract.

This is why the HAMP program works by "encouraging" servicers to basically become loan originators and review documents, verify tax returns, and analyze current loans. The White House can't force the servicers to do any of this. That's why you see assertions about "shaming" the servicers:

In addition, the administration announced that next month it will start publishing company-by-company results, including how many modifications each servicer has made and how quickly. At the least, that will give policymakers ammunition to shame recalcitrant lenders.

“We think that that type of disclosure, servicer-by-servicer, will be important to spurring greater activity on their part,” Herbert Allison, assistant treasury secretary for financial stability, told Dodd’s committee.

If the "policymakers" would pass a bill permitting bankruptcy judges to modify mortgages where servicers either cannot or will not do so, there would be no reason to "shame" anyone. It is confusing to me why so much effort and treasure is being invested in a sort of codified moral suasion and not in any effective legislation. A cynical person might conclude that the "policymakers" are less interested in actually solving the problem than appearingto tryto solve the problem.

The administration seems inclined to blame the servicers for not being sufficiently "shamed" into taking the actions the White House wants them to take:

Administration officials blame the mortgage servicers charged with carrying out the mortgage modifications and refinancing under the federal program. Many of their Democratic allies on Capitol Hill back them up, but others are criticizing the White House for fumbling the execution.

It's easy to blame the servicers - after all, they are the ones on the front line with the homeowners. Can't the servicers just do more modifications?  The simple answer is, 'no.'  The servicers are restrained both by logistical and legal constraints which make it very difficult to voluntarily modify these loans. The solution to this massive problem will never come from the servicing companies.

Record 1.9M Foreclosures in 2009 Despite Obama Plan . . . So Far!

More foreclosure news. . . the numbers are in for the first half of 2009. According to this Reuters story, 1.9 million foreclosures were filed on 1.5 million properties so far this year. The story does not explain the extra 400,000 foreclosures but certainly they involve multiple filings on the same properties. Ouch.

Here's the part of the story that impressed me:

One in every 84 households with loans got at least one foreclosure filing in the first half of this year.

"I don't think this suggests the economy is any worse than anyone expected but I certainly don't think it shows by itself any signs of improvement," Sharga said.

President Obama's housing rescue is gaining momentum in refinancing troubled borrowers with higher-rate loans and modifying untenable terms for others.

But the programs have been off to a slow start and in some cases will be too late or not enough to help severely struggling homeowners, industry analysts agree.

Private sector efforts to alter loans terms have made headway but are facing an uphill battle as the unemployment rate heads to double digits.

This article is unduly optimistic to say that President Obama's housing rescue is "gaining momentum." Notably, the reporter doesn't explain what facts lead him or her to conclude there is any positive momentum. I've said it before here, but it bears repeating: there will be no progress toward fixing the foreclosure problem until there is a fast-track way to evaluate properties for modification of principal, and not just putting people into different "creative" loans.

Most recently I've heard that the Obama administration is "floating" creative ideas like turning upside-down homeowners into "renters." The article I read suggested that bankruptcy judges would be given the power to determine and set the rental amount. It is not clear to me why this would be superior to letting the judge modify the mortgage, even in the eyes of lenders.