The securitization industry may be about to reap the whirlwind of its failure to take the need for reform seriously. As we’ve indicated, industry incumbents have adopted a denialist approach to widespread evidence of serious documentation problems and procedural abuses, and have fought reasonable, pro investor proposals tooth and nail.
The Washington Post reports on several pending legislative proposals in the state of Virginia, all of which seek to level the power imbalance between the financial services industry and mortgage borrowers. The interesting thing about this pushback is that Virginia is not at all left leaning state. These measures instead appears to result from the fact that it has one of the fastest foreclosure processes in the US.
As the Washington Post tells us (hat tip Lisa Epstein):
Homeowners…would be given more time to defend themselves under one proposal. Another bill would require lenders to get the approval of a judge before seizing a home. A third would give homeowners a last-minute chance to avert foreclosure by catching up on overdue payments.
The effort to transform Virginia’s foreclosure process faces an early test Monday, when one of the more far-reaching bills is scheduled for a hearing and a vote in a House subcommittee. The measure would force banks to maintain up-to-date records on Virginia loans in government offices, potentially restraining global trade in these mortgages.
Note that the proposal to require judicial approval before a foreclosure sale is forward-looking and would not affect current foreclosures. But it also would represent a meaningful impairment of lender’s rights in that state. Virginia is a “deed in trust” state, which means the lenders holds title to the house until the mortgage loan is satisfied. The second proposal, to give borrowers the right to cure a default up to the time of the sale of the home, sounds nice but probably does not add up to much.
Giving a borrower the additional time between when a foreclosure is final to when the property is sold to get current is unlikely to lead to more “cures” but would give borrowers more time to mount a legal defense. Nevertheless, it would be far more meaningful to give borrowers clear rights to see the bank’s payment records and detailed calculation of the amount claimed to be due and owing, as well as a process that would allow borrowers to challenge errors and obtain speedy corrections of mistakes and related inappropriate fees.
The most interesting and potentially significant proposed change would effectively put MERS out of business in Virginia. Here is the language from the proposed bill:
Whenever a debt or other obligation secured by a deed of trust, mortgage or vendor’s lien on real estate has been assigned, the assignor or the assignee, at its option, may cause the instrument of assignment to be recorded in the clerk’s office of the circuit court where such deed of trust, mortgage or vendor’s lien is recorded provided such instrument is otherwise in recordable form, or may cause a certificate of transfer signed by the assignor to be recorded in such clerk’s office, and such instrument of assignment or certificate of transfer, upon recordation, shall operate as a notice of such assignment. The instrument of assignment or certificate of transfer shall be indexed in the name of the assignor and in the names of the obligor or maker, and the trustees, as applicable, all of whose names shall be set forth in such instrument or certificate. The certificate of transfer shall conform substantially to the following:r
So the bill would require the traditional practice of having the local courthouse records show for the public at large to see who specifically has a lien on a particular piece of real estate. Thus every transfer of a note (the borrower’s IOU) would also need to be recorded and the associated fees paid. Before industry defenders howl that this will end securitizations, yes, it would change the economics substantially and result in more loans being kept by the orginating bank. But the idea that it would kill securitizations is a gross exaggeration. There was a real estate securitization industry long before MERS became a large scale force in the early 2000s.
In addition, as I read it, this bill would also effectively bar foreclosures in the name of MERS.
The tectonic plates are starting to shift in mortgage land. It would behoove industry incumbents to be a tad more pro-active, but expect them instead to continue to try to block any meaningful change, relying on the usual claim of “it will destroy the housing market”. Funny, they seem to have already done that.
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What is really interesting is that MERS is actually based in Virginia of all places.
On another note there are some additional cases other than Ibanez that are slowly working towards the Massachusetts SJC that will have an impact on MERS. Given the nature of the MA SJC’s ruling in Ibanez the odds in my opinion are not looking good for the mortgage industry to win these additional cases
I wasn’t aware that MERS was based in Virginia, but it is indeed encouraging. Now we just need Minnesota legislators to change the laws here. They essentially gave MERS the right to foreclose several years ago. The law that allows this was written by a MERS rep. Gee. I wonder how much money changed with that one?
I’ll be keeping an eye on Virginia.
Oddly, most all registrars for domains are in Virginia – that might be the reason. The same way that corporations are all based in Delaware, and insurance companies are in South Carolina, domain registrars are in Virginia. It’s possible that the primarily virtual nature of MERS is what caused it to be located where it is. Of course, that means that somehow the laws were favorable. . . .
Thanks Ina. Wasn’t aware of that.
‘Several pending legislative proposals in the state of Virginia … seek to level the power imbalance between the financial services industry and mortgage borrowers. The interesting thing about this pushback is that Virginia is not at all [a] left leaning state.
Not all populist legislation has to emerge from the left. Cracking down on MERS enhances the security of real property title, which the center, right and libertarian sectors can assent to as well, if they haven’t been bought off by banksters.
Vulnerability to bribes, sadly, tends to be fairly nonideological.
Mystery solved?
Property and survival are neither a Democrat nor Republican issue, true. We should be building bridges, not walls.
Show me someone running for office who supports property law and holding banks accountable to their own contracts, and I’ll vote for them!
My own state Senator, Chap Peterson has proposed some of these bills. He is a Democrat representing Fairfax, VA and some of the surrounding parts of Fairfax county. I’ve met the man, who is a part time lawyer (VA state senators are part time)and he has always struck me as a decent person though sometimes too centrist for my tastes.
OTOH surprisingly “Sideshow” Bob Marshall, a very wingnutty senator representing Manassas, VA has also has a foreclosure reform bill. Go figure….
I’m 100% for rule of law and proving right that one has the mortgage on their side before foreclosing. That said, if we want the tax-payer out of the business of providing mortgage credit(and I believe this in our interest) then we need to consider both what we are fixing and the ramifications of the cure).
That said, making more mortgages judicial may well be a good step, especially in light of the rather egregious abuses.
Doesn’t sound like much at all for Virginians. I thought a valid legal defense was in considering whether the following is true:
“Virginia is a “deed in trust” state, which means the lenders holds title to the house until the mortgage loan is satisfied.”
This is the same in states where they have mortgages, it would be helpful if the blogger would do some careful legal anaylsis and spout out something of a bit more value about differences between the two.
Point of clarity:
In stages with mortgages the borrower receives the title at the time of closing (not true in deed-of-trust states, as was correctly pointed out earlier). This fact is an essential difference in how the foreclosure process plays out which is why the person mentioned it.
When the borrower has possession/or the legal title to the property the lender has to file a lawsuit in court to get it from them.
When the lender kept the title from jump street then the borrower has less leverage and the non-judicial process requires that the borrower being notified that their home is being offered for sale (according to local laws of course) but this process is much more lender friendly than the judicial process.
This entire mortgage foreclosing process has lots of nuances depending on a multiplicity of factors.
I’ve written volumes on this topic and separately, I am not a legal research service. You’d have to pay serious hard dollars for that. And I do have to resort to a certain level of generalities given how state-specific some issues are.
If I repeat every bit of legal discussion I have made in every previous post, each post would come to thousands of words and I’d never get any new material done. The explanation is not unclear, and if you are still uncertain, use the search field on this blog. That’s why it’s there.
There goes the CMOs. Mortgages would be price at higher interest rates than the junk bonds. What happens when the Feds stop printing the money? It would make it impossible for average decent Americans to get a mortgage!
Ten percent of population making decisions for 90%. What a country!
I still think we need to make the meme “chain of title” known to all borrowers, so that, no matter what, the chain of title is complete and transprent in every state. True, securitization could continue, but with tansparency of note conveyances manditory.
No matter what, the chain of title should be complete and transparent in every state. True, securitization could continue, but with tansparency of note conveyances manditory.
The language you quote is actually just the existing VA statute. (you’ll note that it doesn’t make recordation mandatory and imposes no penalty for failure to do so)
The bill put before the VA legislature requires that any foreclosing entity have recorded the lien and that there be a full chain of assignments recorded.
“Note that the proposal to require judicial approval before a foreclosure sale is forward-looking and would not affect current foreclosures. But it also would represent a meaningful impairment of lender’s rights in that state.”
With the utmost respect, this is no impairment to lenders rights. Better put would be to say that the lender must now not ignore the rule of existing law.
A forward looking restriction is an impairment. Most lenders see themselves as ongoing businesses.
DARPANET,which became the backbone for the internet, was located in VA because of the Defense Information Systems Agency is HQ in Arlington. AOL, also HQ in during the 1990 in Fairfax and Loudoun counties VA. The internet backbone terminates in this area for obvious reasons. It was funded and supported and used primarily by the military and its ancillary cohorts of the National Security Act, the CIA, in Langely VA. The first commercial ISP, UUNET, now Verizon Business, was an early major internet Tier 1 provider. The entire Northern VA area is clustered with Information Technology HQ, stemming from the government and military contractors, as well as early commercialization of the internet, see Global Crossing, MCI etc. MERS is a web based application service provider to the mortgage industry, similar to Elemica, for the chemical industry, would find much talent in the IT community nearby to set this up and have the capacity of the internet backbone at it doorstep.
It seems to me that uniform conference on state laws should come up with a law allowing electronic submission of documents for recording, and for county level indices (a lot of which exist for currently recorded documents). Then the states adopt this providing for land titles the benefits of the DTCC system for stocks. It still gives the public information that has come out of the courthouses only recently. This system could charge by document instead of by page, and with the user supplying meta data, (and responsible for it) the county would just check for accuracy. Of course I still don’t understand why the industry did not do this in the first place, who opposed so that the industry could not get the law thru and instead invented MERS?
I still have trouble seeing how the banks were able to go around the county recording process.
Any one have knowledge of the term RE recorded? Not sure but seems like BOA is doing Re Recording under Mers without ever establishing they have right to do so.
We have seen in NV also the attempt of BOA to use the state statute
NRS 104 if they can’t produce orginals
I don’t see how the can but they are adding it in on all of their new documents as a boiler plate. If anyone knows how they are angling this , feel free to respond……
apologize in advance for next comment that part of statute in it…..
NRS 104.3309
Enforcement of lost, destroyed or stolen instrument.
1. A person not in possession of an instrument is entitled to enforce the instrument if:
(a) The person seeking to enforce the instrument:
(1) Was entitled to enforce the instrument when loss of possession occurred; or
(2) Has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred;
(b) The loss of possession was not the result of a transfer by the person or a lawful seizure; and
(c) The person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.
2. A person seeking enforcement of an instrument under subsection 1 must prove the terms of the instrument and his right to enforce the instrument. If that proof is made, NRS 104.3308 applies to the case as if the person seeking enforcement had produced the instrument. The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means.
(Added to NRS by 1993, 1244; A 2005, 1999)
This appears to be the Nevada adoption of the UCC. An interesting note is that not all states adopted the revised UCC of the early 90’s. New York is one of those states that did not.
The current New York adoption of the UCC has the following, which imposes even more burdens on a party seeking to enforce a lost instrument:
http://law.onecle.com/new-york/uniform-commercial-code/UCC03-804_3-804.html
“It would behoove industry incumbents to be a tad more pro-active, but expect them instead to continue to try to block any meaningful change, relying on the usual claim of ‘it will destroy the housing market’. Funny, they seem to have already done that.”
Funny. Not. Sigh.
I just found the Fannie Mae publication of its requirements for document custody.
View this full document at:
http://www.efanniemae.com/is/doccustodians/pdf/dcreqdoc.pdf
This document details interesting requirements about lost notes. Check out page 25 about the lost note affidavit, and page 28 for details of handling indorsements in blank.
Fannie Mae requires the following with intervening indorsements:
All intervening endorsements must:
Contain “without recourse” language
Be in the above format (or substantially the same format)
Indicate the printed name and title of the person executing the endorsement
Contain the authorized signatures of the prior note-holders
Contain a completed assignee or “Pay (or Payable) To The Order Of” section
The signature on the last endorsement (to blank) to the note generally must be an original signature. Fannie Mae may permit facsimile endorsements of notes if the endorsing entity provides a corporate resolution authorizing facsimile signatures. In this case, the Document Custodian should obtain from the endorsing entity a copy of the endorsing entity’s corporate resolution, which must specify the names and/or titles of the individuals whose facsimile signatures are valid. If the endorsing entity’s policy delegates facsimile signature authority by title, a list of the titles with the authority is acceptable. The endorsement then must be verified to be in compliance with the corporate resolution.
On an endorsement in blank, if the note is endorsed by an attorney-in-fact on behalf of the endorsing entity, the Document Custodian must obtain and maintain a copy of the notarized power of attorney evidencing the authority of the attorney-in-fact to execute the endorsement in blank.
That requirement is actually very easy to get around. All you have to do is set up a single member LLC to hold the mortgage. Then you just transfer the LLC interest instead of the mortgage.
We used to do this with options all the time in the good old tax shelter days.
Nevertheless, it would be far more meaningful to give borrowers clear rights to see the bank’s payment records and detailed calculation of the amount claimed to be due and owing, as well as a process that would allow borrowers to challenge errors and obtain speedy corrections of mistakes and related inappropriate fees.
How strange is it that transparency has become such a radical concept (to the point that a simple transparency activist becomes the object of international death threats)?
It’s very simple – anyone who wants to keep system secrets is doing it to cover up crimes.
But the capitalist textbooks themselves say markets must be transparent. So by definition any “true” capitalist supports any such measure, and anyone who opposes it is anti-capitalist.
But the fact is that true capitalism exists only in that Chicago egghead ivory tower.
The measure would force banks to maintain up-to-date records on Virginia loans in government offices, potentially restraining global trade in these mortgages.
It looks like the WaPo is on the job as far as propagating the “kill the market” theme.
“Restraint of trade” – I’m scared! Run!
A question, if there is an escrow with the mortgage for taxes and insurance is not an annual statement provided showing all the reciepts and expenditures? Interest paid is also provided on a 1099. At least as late as 1993 such was done. Otherwise how can one check on the escrow account.
VIRGINIA IS ONE OF THE WORST STATES FOR FORECLOSURE DEFENSE. THE COURTS, THE LAWS LENDER FRIENDLY AND IT WOULD AMAZE YOU HOW MANY LEGISLATORS HAVE A REAL ESTATE LICENSE AND HAVE TIES WITH THE MORTGAGE INDUSTRY.
BUT, ANY IMPROVEMENT TO THE CURRENT CORRUPTED AND CRIMINAL LAWS THAT PUSH THE CONSTITUTION AND OUR RIGHTS OUT THE WINDOW IS WELCOME.
By containing the word “may” it doesn’t make anything a requirement. Why are the laws not inclined to use the words MUST and SHALL….these are at least enforceable.
@Chris: I wonder the same thing. They want to balance the State budgets why don’t they start collecting on all the fees they missed out on….or maybe add on a fine for not doing it in the first place. They need to make big business held to the same standard as the public.They need to take on the responsibility of help cut the deficits as much as the average Joe
I would like the following points regarding MERS to be clear to all:
1) It’s not a PAPERWORK issue – it’s an OWNERSHIP issue. Whenever we see the word ‘paperwork’ describing the MERS scam, we should know that the correct word is ‘ownership’.
‘Paperwork’ is defined as: written or clerical work, as records or reports, forming a necessary but often a routine and secondary part of some work or job.
That is not the issue with MERS. The issue is one of fundamental ownership – which is determined by signed and recorded paper.
2) The most significant and basic nature of the MERS scam has not been discussed. It is, quite simply, that the obfuscatory nature of the MERS system allows the originating lender to sell the initial mortgage MORE THAN ONE TIME. I will demonstrate the implications with a simple example.
Now, it may never be possible to prove that the same mortgages were sold repeatedly. In fact, because of the very nature of MERS, it is likely that it would not be possible to show clear evidence. The point is, however, that by flaunting the existing, centuries-old state property laws, MERS allows for this to happen. It does not guarantee that it happened but it allows for it to happen. It may well be the real reason the chain of titles were broken and the ‘paperwork’ has all gone missing.
An example of the situation MERS allows and the financial implications:
Consider a pre-MERS/pre-securitization scenario for a real estate loan. Bank A originates a $500,000 loan. The $500,000 is used to pay the seller of the house. In exchange, Bank A will receive monthly payments for the next 30 years at (for example) 6 percent. If Bank A decides that it does not want to collect small amounts each month, then it may sell the rights to the bank that will pay them the highest price, Bank B. For whatever reason (its own belief on what constitutes a ‘good interest rate’) – Bank B may pay $525,000 for this loan. The assignment of the loan is done based on the stable, ancient property laws of the state, and Bank A has then made $25,000 profit on this transaction. Bank B then owns the loan and there is no ambiguity.
It would be hard to imagine Bank A being tempted to then sell the exact same loan to Bank C. The reason is that there is very clear evidence at the county recorder’s office that the loan was already sold to Bank B.
Now consider the same situation with the MERS system in place.
Bank A makes the same original loan for $500,000 which is used to pay the seller of the house. Now, when it is interested in selling this loan to the highest bidder, Bank A realizes that because the way things operate now (regardless of state laws), it will not be selling the loan directly to another bank (Bank B above). Instead, it has become customary for Bank A to ‘bundle’ hundreds of loans together and sell them all to ‘investors’ who are probably made up of entities such as mutual funds, city governments, foreign governments, etc. Each of these entities likely represents many people’s money – none of whom really have any idea of which individual loans they are purchasing.
Well, after all the bundling and selling to entities and stuff, it may turn out that, on average, Bank A gets $525,000 for each loan – and so in that way it made the same profit.
In this scenario it is not at all hard to imagine Bank A being tempted to sell this same loan again. Unlike before, when there was ‘Bank B’ and ‘Bank C’ and very clear records at the county recorder’s office, there is no ‘Bank B’ but only a mish-mash of bundled loans sold to investors/entities who do not know which loans they have bought — and by the way — the documents have been ‘lost’. In this scenario, it is all too tempting to sell this same loan to the securitized version of ‘Bank C’ – which is the same loan bundled with hundreds of other loans – sold to vague entities who do not know what they have really bought.
Comparing the two scenarios, one might think that Bank A has just doubled its profit. It has just sold the loan twice after all. Wrong! In the second scenario, Bank A has made more than 20 times its profit. In the original scenario, Bank A’s profit is ($525,000 – $500,000) = $25,000. Of course, if the loan is fraudulently sold a second time, then all of the $525,000 from that sale would be (illegal) profit because there would be no transfer of $500,000 to the original seller of the house, as was done with the initial loan. Therefore, Bank A’s profit would be ($25,000 + $525,000) = $550,000.
Bank A has increased its profit by 22 times simply by bundling/schmundling. Is that possible to prove? Probably not, given the destruction of so many documents and the entire system of banks/lawyers/politiicans/lobbyists, etc. But it is not necessary to prove any of this. It is only necessary to realize that the system allows for this, it encourages it, and it is likely the key driving dynamic to all we are seeing unfold. It is far more likely than the latest explanations in the media that banks “wanted to evade fees at the county recorders’ offices”.
It explains why we are where we are. The remedy, of course, is to adhere strictly to the state property laws which have been the same for centuries. These laws require clear, recorded, signed documents which do not allow the above confusion to exist. The courts must simply enforce these laws and let the chips fall where they may. If past foreclosures need to be voided, then so be it.
Fred Smith