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Judges Nixing Foreclosures

Judges Nixing Foreclosures

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Published by Foreclosure Fraud
Foreclosure Fraud
Foreclosure Fraud

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Categories:Types, Research, Law
Published by: Foreclosure Fraud on Oct 22, 2009
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 New Shockwaves From Courts and Accounting Board 
The Next Financial Crisis Hits Wall Street, asJudges Start Nixing Foreclosures
he financial tsunami unleashed by Wall Street’s esurient alchemy of spinning toxic home mortgages into triple-A bonds, a process known assecuritization, has set off its second round of financial tremors.After leaving mortgage investors, bank shareholders, and pensionfiduciaries awash in losses and a large chunk of Wall Street feeding at thepublic trough, the full threat of this vast securitization machine and itsunseen masters who push the levers behind a tightly drawn curtain isplaying out in courtrooms across America.Three plain talking judges, in state courts in Massachusetts and Kansas, anda Federal Court in Ohio, have drilled down to the “straw man” aspect of securitization. The judges’ decisions have raised serious questions as to thelegality of hundreds of thousands of foreclosures that have transpired aswell 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) hasmade rule changes that will force hundreds of billions of dollars of thesesecuritizations back onto the Wall Street banks balance sheets,necessitating the need to raise capital just as the unseemly courtroomdramas are playing out.The problems grew out of the steps required to structure a mortgagesecuritization. In order to meet the test of an arm’s length transaction, passmuster with regulators, conform to accounting rules and to qualify as anactual sale of the securities in order to be removed from the bank’s balancesheet, the mortgages get transferred a number of times before being sold toinvestors. Typically, the original lender (or a sponsor who has purchasedthe mortgages in the secondary market) will transfer the mortgages to alimited purpose entity called a depositor. The depositor will then transferthe mortgages to a trust which sells certificates to investors based on thevarious risk-rated tranches of the mortgage pool. (Theoretically, the lowerrated tranches were to absorb the losses of defaults first with the toptriple-A tiers being safe. In reality, many of the triple-A tiers have receivedratings 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, WallStreet firms decided to just issue blank mortgage assignments all along thechannel of transfers, skipping the actual physical recording of the mortgageat the county registry of deeds.Astonishingly, representatives for the trusts have been foreclosing onhomes across the country, evicting the families, then auctioning the homes,without a proper paper trail on the mortgage assignments or proof that theyhad legal standing. In some cases, the courts have allowed therepresentatives to foreclose and evict despite their admission that theoriginal mortgage note is lost. (This raises the question as to whether thesemortgage notes are really lost or might have been fraudulently used inmultiple securitizations, a concern raised by some Wall Street veterans.)But, at last, some astute judges have done more than take a cursory lookand render a shrug. In a decision handed down on October 14, 2009, JudgeKeith Long of the Massachusetts Land Court wrote: “The blank mortgage assignments they possessed transferrednothing...in Massachusetts, a mortgage is a conveyance of land.Nothing is conveyed unless and until it is
conveyed. Thevarious agreements between the securitization entities statingthat each had a right to an assignment of the mortgage are
an assignment and they are certainly not in
am Martens: Judges Start Nixing Foreclosureshttp://www.counterpunch.org/martens10212009.html1 of 410/22/2009 8:09 AM
 recordable form...The issues in this case are not merelyproblems with paperwork or a matter of dotting i’s and crossingt’s. Instead, they lie at the heart of the protections given tohomeowners and borrowers by the Massachusetts legislature. Toaccept the plaintiffs’ arguments is to allow them to takesomeone’s home without any demonstrable right to do so, basedupon the assumption that they ultimately will be able to showthat they have that right and the further assumption thatpotential bidders will be undeterred by the lack of ademonstrable legal foundation for the sale and will nonethelessbid full value in the expectation that that foundation willultimately be produced, even if it takes a year or more. The lawrecognizes the troubling nature of these assumptions, the harmcaused if those assumptions prove erroneous, and commandsotherwise.” [Italic emphasis in original.] (U.S. Bank NationalAssociation v. Ibanez/Wells Fargo v. Larace)A month and a half before, on August 28, 2009, Judge Eric S. Rosen of theKansas Supreme Court took an intensive look at a “straw man” some WallStreet firms had set up to handle the dirty work of foreclosure and serve asthe “nominee” as the mortgages flipped between the various entities. CalledMERS (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 BankersAssociation and assorted mortgage and title companies. According to theMERSCORP web site, these “shareholders played a critical role in thedevelopment of MERS. Through their capital support, MERS was able to fundexpenses related to development and initial start-up.” In recent years, MERS has become less of an electronic registration systemand more of a serial defendant in courts across the land. In a May 2009document titled “The Building Blocks of MERS,” the company concedes that “Recently there has been a wave of lawsuits filed by homeowners facingforeclosure which challenge MERS standing…” and then proceeds over thenext 30 pages to describe the lawsuits state by state, putting a decidedlyoptimistic spin on the situation.MERS doesn’t have a big roster of employees or lawyers running around thecountry foreclosing and defending itself in lawsuits. It simply deputizesemployees 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 ontheir web site: “A certifying officer is an officer of the Member [mortgagecompany or bank] who is appointed a MERS officer by the CorporateSecretary of MERS by the issuance of a MERS Corporate Resolution. TheResolution authorizes the certifying officer to execute documents as a MERSofficer.” Kansas Supreme Court Judge Rosen wasn’t buying MERS’ story. In fact,Wall Street was probably not too happy to land before Judge Rosen. InJanuary 2002, Judge Rosen had received the Martin Luther King “Living theDream” Humanitarian Award; he previously served as Associate GeneralCounsel for the Kansas Securities Commissioner, and as Assistant DistrictAttorney in Shawnee County, Kansas. Judge Rosen wrote: “The relationship that MERS has to Sovereign [Bank] is moreakin to that of a straw man than to a party possessing all therights given a buyer… What meaning is this court to attach toMERS's designation as nominee for Millennia [Mortgage Corp.]?The parties appear to have defined the word in much the sameway that the blind men of Indian legend described an elephant-- their description depended on which part they were touchingat any given time. Counsel for Sovereign stated to the trialcourt that MERS holds the mortgage ‘in street name, if you will,and our client the bank and other banks transfer thesemortgages and rely on MERS to provide them with notice of foreclosures and what not.’ ” (Landmark National Bank v. BoydA. Kesler)Lawyers for homeowners see a darker agenda to MERS. TimothyMcCandless, a California lawyer, wrote on his blog as follows: “…all across the country, MERS now brings foreclosureproceedings in its own name -- even though it is not the
am Martens: Judges Start Nixing Foreclosureshttp://www.counterpunch.org/martens10212009.html2 of 410/22/2009 8:09 AM
 financial party in interest. This is problematic because MERS isnot prepared for or equipped to provide responses to consumers’ discovery requests with respect to predatory lending claims anddefenses. In effect, the securitization conduit attempts to use afaceless and seemingly innocent proxy with no knowledge of predatory origination or servicing behavior to do the dirty workof seizing the consumer’s home. While up against the wall of foreclosure, consumers that try to assert predatory lendingdefenses are often forced to join the party -- usually aninvestment trust -- that actually will benefit from theforeclosure. As a simple matter of logistics this can be difficult,since the investment trust is even more faceless and seeminglyinnocent than MERS itself. The investment trust has nocustomer service personnel and has probably not even retainedcounsel. Inquiries to the trustee -- if it can be identified -- aretypically referred to the servicer, who will then direct counselback to MERS. This pattern of non-response gives thesecuritization conduit significant leverage in forcing consumersout of their homes. The prospect of waging a protracteddiscovery battle with all of these well funded parties in hopes of uncovering evidence of predatory lending can be too dauntingeven for those victims who know such evidence exists. Soimposing is this opaque corporate wall, that in a ‘vast’ numberof foreclosures, MERS actually succeeds in foreclosing withoutproducing the original note -- the legal sine qua non of foreclosure -- much less documentation that could supportpredatory lending defenses.” One of the first judges to hand Wall Street a serious slap down wasChristopher A. Boyko of U.S. District Court in the Northern District of Ohio.In an opinion dated October 31, 2007, Judge Boyko dismissed 14foreclosures 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 havetraditionally controlled, and still control, the foreclosureprocess…There is no doubt every decision made by a financialinstitution in the foreclosure is driven by money. And the legalwork which flows from winning the financial institution’s favor ishighly lucrative. There is nothing improper or wrong withfinancial institutions or law firms making a profit – to thecontrary, they should be rewarded for sound business and legalpractices. However, unchallenged by underfinanced opponents,the institutions worry less about jurisdictional requirements andmore about maximizing returns. Unlike the focus of financialinstitutions, the federal courts must act as gatekeepers…” (In ReForeclosure Cases)While the illegal foreclosure filings, investor lawsuits over securitizationimproprieties, and predatory lending challenges play out in courts acrossthe country, a few sentences buried deep in Citigroup’s 10Q filing for thequarter ended June 30, 2009 signals that we’ve seen merely a few warts onthe head of the securitization monster thus far and the massive torsoremains well hidden in murky water.Citigroup tells us that the Financial Accounting Standards Board (FASB) hasissued a new rule, SFAS No. 166, and this is going to have a significantimpact on Citigroup’s Consolidated Financial Statements “as the Companywill lose sales treatment for certain assets previously sold to QSPEs[Qualifying Special Purpose Entities], as well as for certain future sales, andfor 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 gooff? “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 moveback onto Citi’s books.Bottom line says Citi: “… the cumulative effect of adopting these new accountingstandards as of January 1, 2010, based on financial information
am Martens: Judges Start Nixing Foreclosureshttp://www.counterpunch.org/martens10212009.html3 of 410/22/2009 8:09 AM

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