Pam Martens: Judges Start Nixing Foreclosures http://www.counterpunch.org/martens10212009.

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New Shockwaves From Courts and Accounting Board

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

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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

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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

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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

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