Housing is on fire, is lending the accelerant?
Is another mortgage crisis among us or is it the same crisis that has supposedly been resolved and rectified? Are all of the pieces that crashed housing still lying around acting as accelerant to the fire that is housing? Possibly.
This week, Reuters’ Scott Paltrow did an extensive study on robo-signing, missing promissory notes and the status of MERS, all of which were supposedly no longer problematic in the American mortgage world.
Robo-signing debacle is far from over
Recently, we asked who was to blame for the economic crisis? Fingers pointed everywhere with a large group blaming the robo-signing scandal (where banks didn’t manually review documents before foreclosure leading to illegal foreclosures on wrong addresses, homes paid in full and various other mistakes), including state and federal agencies seeking damages.
“The robo-signing debacle is commonly pointed to as a major cause of the economic downturn, as companies like Lender Processing Services (LPS) and CoreLogic, both having recently been sued by the FDIC who says they provided automated inflated appraisals causing banks to make investments on loans they otherwise wouldn’t have, thus taking a major financial hit.”
At the end of 2010, banks nearly unanimously said they were halting robo-signings so that these wrongful (read: illegal) foreclosures would come to a stop. Today, Reuters’ investigation revealed that robo-signatures numbered in the thousands with “known robo-signers” still in action. How can this be?
The banks say it is a technicality, that all homes discovered with flawed paperwork were legitimately under foreclosure. Regardless, robo-signing isn’t over even though banks claimed they were and despite many lawsuits regarding robo-signatures and despite many believing robo-signing is the root of the entire economic collapse.
Flawed paperwork? What about missing paperwork?
In yet another report, Reuters unveiled a highly ignored yet highly flammable housing issue. “There are signs, however, that servicers resort to doubtful documents because they have no choice if they are determined to foreclose: To a great extent, originals simply don’t exist. It’s one of the overlooked legacies of the housing boom.”
In a “rush” to get loan packages sold to investors, many banks either destroyed or failed to turn over original promissory notes or mortgage documents, both of which are legally required in order to convey ownership. Many of these banks have since gone under.
“From 2004 through the end of the housing boom in 2006, more than half of all new mortgages were securitized and sold to such pools, known as mortgage-securitization trusts, according to the Securities Industry and Financial Markets Association.”
That is a substantial amount of paperwork eternally missing, how can many foreclosures be anything but contested if a bank now owning a mortgage can’t even prove they own the loan?
“The result is that trusts may be out many billions of dollars, says Matthew Weidner, a lawyer who specializes in mortgage litigation. If proper procedures are followed now, foreclosures could slow to a trickle. And a cloud would hang over title to millions of homes, potentially further depressing the housing market.”
Most revealing of the three failing pillars: MERS
Reuters’ expose on Mortgage Electronic Registration Systems (MERS) is where the cracks in the continuing mortgage crisis begin to show.
With only 50 full time employees, MERS “claims to own about half of all mortgages in the United States, roughly 60 million loans, and is involved in about 60 percent of new mortgages issued.”
MERS was established by Fannie Mae and Freddie Mac just over 15 years ago in conjunction with several major banks as a means to expedite the loan recording process as it used to be done through individual county clerk offices which was slow. “The founders went ahead even though no state laws authorized them to bypass the required filing with clerks,” according to Reuters.
Testimony was uncovered from 2009 where MERS employees noted they “did little but maintain the computer database” and that “For a $25 fee, employees of any of the 3,000 loan servicers that belonged to MERS could get themselves designated as a MERS “vice president” or “assistant secretary,” authorized to sign official documents on behalf of MERS.”
This spring, federal regulators included MERS along with 14 lenders as “engaged in unsafe or unsound practices” in transferring mortgages, requiring them to reform even though they still claim no wrongdoing.
Reuters said, “In practice, when servicers needed to create mortgage assignments to replace missing ones for foreclosure cases, their own employees, signing as MERS officials, printed out newminted documents and signed their names to them. MERS has served in effect as an instant teller machine for mortgage assignments. Servicers simply have their own employees sign the needed documents as MERS officials.”
Courts for years have upheld MERS assignments despite homeowners’ challenges of their documentation. Now, several states are noting that MERS doesn’t own the note, therefore, it has no power to transfer to servicers the right to foreclose.
Why this all equates to another mortgage crisis
Each of these alone would be enough to threaten housing, but together, there is a real danger looming. Banks have been ordered to reform and claim they have done so, yet robo-signing continues. Foreclosures are occurring at staggering rates and although it is not in dispute whether or not most of them are actual defaults, the fact that original promissory notes are gone forever leaves a huge question mark as to how a foreclosure can hold up in court without a bank being able to prove ownership of the loan? Furthermore, MERS claims to own half of all American loans and courts are beginning to rule that it was never legal for them to transfer the right to foreclose in the first place.
The silver lining is that discovery that the same issues are still at hand that caused much of the deterioration of the real estate sector could possibly lead to resolution of some sort. Without resolution, however, if these three factors remain, the majority of foreclosures) whether in legitimate default or not) will not hold up in court.