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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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In January 2002. Through their capital support. According to the MERSCORP web site.The issues in this case are not merely problems with paperwork or a matter of dotting i’s and crossing t’s. MERS was able to fund expenses related to development and initial start-up. MERS has become less of an electronic registration system and more of a serial defendant in courts across the land. 2009. MERS now brings foreclosure proceedings in its own name -. Inc. they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts legislature. MERS doesn’t have a big roster of employees or lawyers running around the country foreclosing and defending itself in lawsuits. Boyd A. on August 28. Judge Eric S.counterpunch. which in turn is owned by units of Citigroup. 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.org/martens10212009.” 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. Called MERS (Mortgage Electronic Registration Systems. It calls these deputies a “certifying officer.their description depended on which part they were touching at any given time.S.” Kansas Supreme Court Judge Rosen wasn’t buying MERS’ story. Instead.html themselves an assignment and they are certainly not in recordable form. Timothy McCandless. he previously served as Associate General Counsel for the Kansas Securities Commissioner. putting a decidedly optimistic spin on the situation. The law recognizes the troubling nature of these assumptions. The Resolution authorizes the certifying officer to execute documents as a MERS officer. It simply deputizes employees of the banks and mortgage companies that use it as a nominee. Counsel for Sovereign stated to the trial court that MERS holds the mortgage ‘in street name. and as Assistant District Attorney in Shawnee County. and commands otherwise.]? The parties appear to have defined the word in much the same way that the blind men of Indian legend described an elephant -. Kesler) Lawyers for homeowners see a darker agenda to MERS. a California lawyer. Judge Rosen had received the Martin Luther King “Living the Dream” Humanitarian Award. 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. Bank National Association v. the Mortgage Bankers Association and assorted mortgage and title companies. Kansas. In fact.” 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.” [Italic emphasis in original.Pam Martens: Judges Start Nixing Foreclosures http://www.’ ” (Landmark National Bank v. wrote on his blog as follows: “…all across the country. In a May 2009 document titled “The Building Blocks of MERS. To accept the plaintiffs’ arguments is to allow them to take someone’s home without any demonstrable right to do so.. Wall Street was probably not too happy to land before Judge Rosen.) it’s a bankruptcyremote subsidiary of MERSCORP. JPMorgan Chase.. even if it takes a year or more. these “shareholders played a critical role in the development of MERS. Ibanez/Wells Fargo v. Bank of America. Larace) A month and a half before.] (U.even though it is not the 2 of 4 10/22/2009 8:09 AM .” In recent years. 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. the harm caused if those assumptions prove erroneous. if you will. 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.
MERS actually succeeds in foreclosing without producing the original note -. Unlike the focus of financial institutions. as well as for certain future sales. Judge Boyko dismissed 14 foreclosures that had been brought on behalf of investors in securitizations.Pam Martens: Judges Start Nixing Foreclosures http://www. Boyko of U.the legal sine qua non of foreclosure -.if it can be identified -. and predatory lending challenges play out in courts across the country. investor lawsuits over securitization improprieties. SFAS No. the federal courts must act as gatekeepers…” (In Re Foreclosure Cases) While the illegal foreclosure filings. who will then direct counsel back to MERS. 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]. So imposing is this opaque corporate wall. And the legal work which flows from winning the financial institution’s favor is highly lucrative. Just when might we expect this new land mine to go off? “SFAS 166 is effective for fiscal years that begin after November 15. a few sentences buried deep in Citigroup’s 10Q filing for the quarter ended June 30.” One of the first judges to hand Wall Street a serious slap down was Christopher A. In an opinion dated October 31. and still control. consumers that try to assert predatory lending defenses are often forced to join the party -. As a simple matter of logistics this can be difficult. 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.that actually will benefit from the foreclosure. 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. In effect. long story short. 2007. The investment trust has no customer service personnel and has probably not even retained counsel. Judge Boyko delivered the following harsh rebuke in a footnote: “Plaintiff’s ‘Judge. unchallenged by underfinanced opponents. more of those off balance sheet assets are going to move back onto Citi’s books.html proceedings in its own name -. District Court in the Northern District of Ohio.are typically referred to the servicer. While up against the wall of foreclosure. There is nothing improper or wrong with financial institutions or law firms making a profit – to the contrary. 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. and for certain transfers of portions of assets that do not meet the definition of participating interests. This pattern of non-response gives the securitization conduit significant leverage in forcing consumers out of their homes.much less documentation that could support predatory lending defenses. 2010. you just don’t understand how things work.usually an investment trust -. Citigroup tells us that the Financial Accounting Standards Board (FASB) has issued a new rule. The FASB has also issued SFAS 167 and. the institutions worry less about jurisdictional requirements and more about maximizing returns. 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. that in a ‘vast’ number of foreclosures. 2009. 166.S.even though it is not the financial party in interest. Inquiries to the trustee -. However. based on financial information 3 of 4 10/22/2009 8:09 AM . the foreclosure process…There is no doubt every decision made by a financial institution in the foreclosure is driven by money.’ argument reveals a condescending mindset and quasimonopolistic system where financial institutions have traditionally controlled. since the investment trust is even more faceless and seemingly innocent than MERS itself.” There’s more bad news. they should be rewarded for sound business and legal practices.org/martens10212009.counterpunch. Bottom line says Citi: “… the cumulative effect of adopting these new accounting standards as of January 1.
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. Houses don’t spawn new technologies.Pam Martens: Judges Start Nixing Foreclosures http://www. 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. in any company mentioned in this article other than that which the U. patents.counterpunch. Regulators are receiving letters from Citigroup and other Wall Street firms pressing hard to rethink when this change will take effect.0 billion…. If we understand the true function of Wall Street. by acting as wholesale lenders to the unscrupulous mortgage firms (some in house at Wall Street firms). long or short. 2010. Also.org/martens10212009. Houses don’t create the jobs of tomorrow. based on financial information as of June 30.S. Pam Martens worked on Wall Street for 21 years. Today’s Wall Street.com 4 of 4 10/22/2009 8:09 AM . Citigroup is far from alone in financial hits that will be coming from the Qualifying Special Purpose Entities. 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.3 billion.” [Emphasis in original. to efficiently allocate capital. 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. She can be reached at firstname.lastname@example.org standards as of January 1. is just another straw man for a rigged wealth transfer system.] 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. Treasury has thrust upon her and fellow Americans involuntarily through TARP. new industries. it was creating an artificial demand simply to create mortgage product to feed its securitization machine and generate big fees for itself.3 billion and the recognition of related deferred tax assets amounting to approximately $5. the answer must be a resounding no to this racket. Wall Street was not responding to legitimate consumer demand. Putting aside for the moment the massive predatory lending frauds bundled into mortgage securitizations. she has no security position. 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. would result in an estimated aggregate after-tax charge to Retained earnings of approximately $8. it turns out. 2009. She writes on public interest issues from New Hampshire.
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