By L. Randall Wray
Every link of the home finance food chain was designed to promote fraud—from the mortgage brokers and appraisers who conspired to overvalue property to stick buyers with overpriced homes, to the mortgage lenders who preferred the riskiest mortgages to maximize interest and fees, on to the investment bankers that packaged them into securities that they bet would blow up, and to the credit rating agencies who conspired to certify the junk as triple A. We should not forget the hedge fund managers who worked closely with investment banks like Goldman to re-securitize the very worst stuff into CDOs, sold on to Goldman’s gullible customers, nor the mortgage servicers (who not coincidentally happen to be the same biggest banks that created the toxic mortgages) who now maximize late fees as they drag out foreclosures while preventing loan modifications.
But that is not the end of the story, by any means. The next shoe that dropped was the recognition that the foreclosures, themselves are fraudulent. Heck, it wasn’t enough that banks are foreclosing on the wrong debtors, sometimes with two banks competing to foreclose on the same owner–they are also foreclosing on homeowners with no mortgages, who own their homes outright! Banks were caught hiring professional fraudsters to manufacture documents, including the “wet ink” notes that are required to prove that one is actually a creditor. Mere document forgery is not bad enough as bank management lies in court—committing perjury: they claim to have misplaced documents, lost them, cannot find them, looking for them, dog ate them, accidentally sent them through the wash. You know the drill if you have ever taught a class of freshmen.
Yet, all is said to be in order—Bank of America claims to have reviewed its foreclosures and could not find a single improper action. After all, the homeowners are clearly deadbeats who are not making payments. A bunch of borrower fraud by clever high school dropouts that duped the nation’s most sophisticated “big boy” banks. Can the banks prove that? Uh, no, they have not kept adequate records to prove who owes what, who owns what, and who has paid what to whom. But they are sure the docs will show up, as soon as the banksters can forge them.
Ah, yes, ain’t the “ownership society” (as ex-President Bush proclaimed it) just grand? It was always the plan to indebt homeowners and then to transfer their homes to the true owners in our society—those on the northside of the top 3% of the kinked income and wealth distribution. As planned, the elite are quietly buying up blocks of improperly foreclosed homes for pennies on the dollar. If we could just speed up the foreclosures, dump more homes onto the market, and push the prices down some more, we could complete the transition to Bush’s ownership society—ownership at the top, indebted renters or homeless vagrancy everywhere else.
What has been truly shocking is the state of the paperwork. These are banks! One would think that they might have hired a few people to keep track of the documents, the payments, the delinquencies? But, no, they didn’t do that. Lost ‘em. Do you want to trust your life savings to these bozos—who have no idea where they might have misplaced something as important as the note that proves they are entitled to foreclose on a home when the debtor stops making payments on the mortgage? The same banks that misplace the payments, credit them to the wrong account, and send foreclosure notices to the wrong homeowners? Oh yes, I want them to handle my banking account with the automatic payments on auto loans for cars I never owned!
In their defense, the banksters say that they never saw a wave of delinquencies coming, so they never hired the staff required to take care of all the paperwork. Michael Heid, co-president of Wells Fargo Home Mortgage, claimed “In hindsight, we were all slow to jump on the issue. When you think about what it costs to add 10,000 people, that is a substantial investment in time and money along with the computers, training and system changes involved.” Yes with delinquencies spiking since 2007, the banksters have been a wee bit slow on the uptake—almost 4 years into the crisis they are now starting to ramp up, you betcha! Servicing a mortgage was never thought to be sufficiently profitable that one would actually want to devote resources to collecting the payments, crediting the accounts, documenting the delinquencies, and foreclosing when things go bad. So much paperwork, so little profits.
A critic might retort that they ought to hold off on the foreclosures until they actually do hire the staff and locate the necessary paperwork. But that would throw a monkey wrench into the plans for an ownership society. So many millions of homes to foreclose, so little time to throw those families out onto the streets.
So they’ve been busy hiring “Burger King kids” with no education or training or expertise, who couldn’t tell a mortgage note from a Freedom fry. They’ve created a whole new occupation, the RoboSigner. Not quite the RoboCop, the job description for the RoboSigner only requires a willingness to forge documents and to serve hard time behind bars with guys and gals pierced in places you don’t want to see. The banks make them executive Vice Presidents, hand them a notary stamp and a pen and tell them they need—oh—10,000 signed and notarized notes by end of business. Like, today, Buffy!
Sorry, that dog won’t hunt. The truth is that the banks purposely destroyed the documents and created a superficially sloppy system because that made it easier to perpetrate fraud– accounting fraud, tax fraud, and document fraud–in order to enrich top management. Fraud. Fraud. Fraud.
Let us just focus here on the role played by MERS—Mortgage Electronic Registry Systems Inc—which registers 66 million mortgages, or 60% of the total. This was created to defraud counties all across the country. In the old days, a mortgage got recorded and a fee was paid for the service, and each time the mortgage got resold another recording and fee was required. The purpose is to ensure clear claims on property—both to ensure that foreclosures are proper and to ensure that when foreclosed property is sold, the new owner can be ensured of clear title. The procedure dates back hundreds of years and is necessary if you want private property rights.
But the banksters hated those recording fees, particularly because the securitized mortgages might be resold a dozen times—and who wants to pay a fee for each transaction. That is so 1980s. (Of course, banksters love to charge fees for every transaction—for every breath you as customer take–they just hate to pay them!) So MERS claimed to offer an alternative, circumventing the county fees and tracking electronically the transfers of ownership of mortgages. It was also more modern—no more wet ink notes that might get lost in the wash or eaten by the neighbor’s dog. The records would be electronic, more efficient, and certainly more foolproof. Right!
No worries about errors of data entry, system crashes, hackers, or fabricated records. The whole thing would be idiot proof, and to prove that, MERS hired, well, idiots to run the thing. And the pudding’s proof is now featured in foreclosure cases at a court near you, with the idiots appearing before judges and trying to explain why the whole thing is an idiotic mess replete with errors of data entry, system crashes, hackers, and records fabricated by idiots squared and cubed, just like the securities based on the underlying sliced and diced mortgages put together by richly rewarded idiot savants now vacationing in the Caribbean.
Besides, banksters had learnt their lesson from Ollie North and needed plausible deniability. Those pesky little documents might come back to haunt them should someone later file a lawsuit. We know that brokers pushed inappropriate and unaffordable mortgages onto home buyers. We know that brokers and bankers forged documents—often after the fact to make mortgages appear to fit requirements investors placed on securities. We know that Goldman sold toxic CDOs to customers then bet on failure. In short, we know that everyone involved in the food chain was perpetrating fraud. Fraud, with a capital F. It was, and remains, the preferred business model of Wall Street.
MERS seemed to offer the perfect instrument for fraud, with its motto “process loans, not paperwork”. The Florida Mortgage Bankers Association admits that its members purposely destroyed the notes on the belief that electronic registry was sufficient, more modern, and carried no paper trail. Banks all over the country “misplaced” damaging documents, fed them to dogs and shredders, and then replaced them with conveniently more useful forgeries. Most notes were probably never transferred from the brokers—many of whom went bankrupt—putting mortgages and securities into a hellish limbo. Some reports indicate that fired workers took notes home as bargaining chips for back pay. They probably ended up lining bird cages and cat litter boxes. Can anyone say “clear chain of title”? In any event, who wants paperwork that might result in real jail time? Best to give it to the birds.
MERS also helped to perpetrate tax fraud. Mortgages were typically securitized and pooled in a Real Estate Mortgage Investment Conduit (REMIC) that would hold them in trust. Done properly this allowed them to take advantage of an IRS tax exemption. However, to avoid the county recording fees, MERS claimed to hold the mortgage loans so that it could allow them to be traded without paying the fees and filing the paperwork. But if MERS was holding them, how could they be in the REMIC trust? The IRS code is very strict—the paperwork must be conveyed to the REMIC. There must be a clear paper chain of title through the securitization and sales. Without the paperwork, the securitizations may not be legal, and could subject investors to back taxes and penalties. And in 45 states the notes are required for foreclosure.
MERS is busy helping to foreclose on its theory that it holds the mortgages—yet it does not have any notes. And if MERS really is the holder then the REMIC was a tax fraud from day one. So MERS wants it both ways at once: for the purposes of the REMIC tax advantage, MERS is only a database; but for the purpose of the securitizations and avoidance of county fees, MERS is the owner of the mortgages. Nice work if you can get it—tax evasion and fee avoidance.
In response to this mess, Representative Marcy Kaptur (Ohio) is going to introduce legislation to prohibit Fannie and Freddie from buying new mortgages that are registered in MERS. Since there is virtually no activity in mortgage markets save what Fannie and Freddie are doing, this would effectively take away all new business from MERS.
Further, her legislation would direct HUD to study the creation of a federal land title system to replace MERS while protecting rights of state and local governments. This is a sensible solution that would modernize the recording and tracking of property ownership. At the same time it would put out of business the hopelessly incompetent MERS, which has partnered with the banksters to perpetrate foreclosure fraud. Bye bye fraudsters.
Predictably, the industry has responded with an army of lobbyists who are spreading funds around Washington, hoping to buy the support that will be needed to protect MERS and the fraudsters. They want Congress to retroactively legalize everything MERS and the banksters did: legalize the avoidance of recording fees that cost counties billions of dollars; legalize the tax fraud that reduced Treasury revenue; legalize the illegal foreclosures; and legalize the securities fraud.
Oh, and they want Congress to reward MERS for its supreme incompetence by granting it the monopoly rights to run a national registry of mortgage fraud. Sort of like picking “heckuvajob Brownie” to run disaster relief. Wait, we tried that, with predictable results.
The truly scary thing is that MERS could win. Congress had already tried to legalize fraudulent forgery with its Interstate Recognition of Notarizations Act of 2009. President Obama used his pocket veto to decline to sign it. But we cannot be sure that he will block MERS’s latest attempt to ex post validate past illegal practices.
Congress is being told that nothing short of legalization of fraud will end the crisis of improper foreclosures as well as the lawsuits by investors in the fraudulent securities. It is claimed that we must let the banks continue to seize homes—even where they can provide no proof that they are creditors. We must stop the suits by investors like the NYFed and PIMCO, who claim that the mortgages put into securities did not correspond to the representations made by the investment bankers. And we have got to prevent the counties from collecting the fees they are owed. In short, we have to legalize robbery to save Wall Street’s robber barons.
Nothing could be farther from the truth. This crisis will not end until the fraud stops and the fraudsters are securely behind bars. The rule of law must be restored before faith in our institutions and our economy can be renewed. Both the right and the left can come together on this issue, to support Representative Kaptur’s legislation to stop government support for MERS. Prohibiting Freddie and Fannie use of MERS is the first step to restoring sanity in America.
Here is the beginning of my post. And here is the rest of it.