MERS, Banks Sued by New York State; MERSCORP Responds

Three major banks and Virginia-based
MERSCORP, Inc. and its subsidiary Mortgage Electronic Registrations Systems
(MERS) were sued Friday by the state of New York.  The suit, filed by the state’s Attorney
General Eric T. Schneiderman
, charges that the creation and use of a privately
national electronic registration system, MERS, “has resulted in a wide range of deceptive and fraudulent foreclosure
filings in New York state and federal courts, harming homeowners and
undermining the integrity of the judicial foreclosure process.”  Further, the lawsuit charges that the
employees and agents of the three banks, Bank of America, J.P. Morgan Chase,
and Wells Fargo
, acting as “MERS certifying officers,” have
repeatedly submitted court documents containing false and misleading information
that made it appear that the foreclosing party had the authority to bring a
case when in fact it may not have.  The
suit also names additional defendants for some of the charges including loan
servicing subsidiaries of the three banks.

The
lawsuit, filed in the Supreme Court of the State of New York, Kings County levies
the following charges:   

  • MERS was created to allow financial
    institutions to evade country recording fees, avoid the need to publicly record
    mortgage transfers and facilitate the rapid sale and securitization of
    mortgages. MERS members log all of their
    transfers in a private electronic registry rather than in the local county
    clerk’s office.
     
  • MERS is a shell company with no
    economic interest in any mortgage loan.
    It is the nominal “mortgagee” of the loan in the public records and
    remains as such regardless of how often the loan is sold or transferred among
    its members.
     
  • MERS has few or no employees but
    serves as the mortgagee for tens of millions of mortgages. It has indiscriminately designated over
    20,000 MERS member employees as MERS “certifying officers” expressly
    authorizing them to assign MERS mortgages and execute paperwork to foreclose on
    properties and submit claims in bankruptcy proceedings while failing to
    adequately screen, train, or monitor their activities. Assignments were often automatically
    generated and “robo-signed” by individuals who did not review the
    underlying property ownership records, confirm the documents’ accuracy, or even
    read the documents. MERS certifying
    officers have regularly executed and submitted in court mortgage assignments
    and other legal documents on behalf of MERS without disclosing that they are
    not MERS employees, but instead are employed by other entities, such as the
    mortgage servicer filing the case or its counsel.
     
  • Use of the private database to
    record property transfers has eliminated homeowners’ and the public’s ability
    to track them through the traditional public records system. This data base is plagued with inaccuracies
    and errors which make it difficult to verify the chain of title or the current
    note-holder. In addition, as a result of these
    inaccuracies, MERS has filed mortgage satisfactions against the wrong property.
     
  • This “bizarre and complex end-around
    of the traditional recording system” has saved banks more than $2 billion in
    recording fees and allowed the banks to securitize and sell millions of loans, “often
    misrepresenting the quality and nature of the mortgages being transferred.”
     
  • The creation and use of the MERS
    System by the Defendant Servicers and other financial institutions has resulted
    in a wide range of deceptive and illegal practices, particularly with respect
    to the filing of New York foreclosure proceedings in state courts and federal
    bankruptcy proceedings.

The lawsuit estimates that MERS
members have brought over 13,000 foreclosures against New York homeowners
naming MERS as the foreclosing property when in many cases MERS lacks the
standing to foreclosure.  Even when
foreclosures were not initiated in MERS name, proceedings related to their
registered loans often included deceptive information.

The lawsuit seeks a declaration that
the alleged practices violate the law, as well as injunctive relief, damages
for harmed homeowners, and civil penalties. The lawsuit also seeks a court
order requiring defendants to take all actions necessary to cure any title
defects and clear any improper liens resulting from their fraudulent and
deceptive acts and practices.

On January 24 the U.S. Court of
Appeals for the 11th Judicial Court upheld an appeal from MERS that
contended a lower court had erred in finding that a homeowner had been
improperly foreclosed on by MERS on the grounds that:

1).   The assignment of the security deed was
invalid because MERS, as nominee of a defunct lender could not assign the
documents of its own volition.

2.
    The “splitting” of the mortgage and
the note rendered the mortgage null and void and therefore notices of
foreclosure were invalid as not coming from a secured creditor.

The New York suit differs slightly from
the facts in Smith V. Saxon Mortgage,
but if Schneiderman wins his case, it could be that the legitimacy of MERS will
ultimately have to be decided by the U.S. Supreme Court.

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Housing Assistance 2012: Another Herculean Task for the FHA

Beginning the 37th month of his presidency, the Obama Administration today announced a laundry list of new programs to help struggling homeowners, crack down on abusive lending practices, make mortgage documents easier to read, convert REO to rental, and other assorted initiatives.  Some require Congressional approval; others are a work in progress, and a couple can begin quickly.
 
At the heart of the announcement is a broad new refinance program with the venerable FHA stepping in (once again) to help save the mortgage market by offering current but underwater non-FHA borrowers another lifeline.
 
Concurrently, the Administration appears to be on the verge of a broad-based “REO-to-Rental” initiative by announcing a pilot project to be led by FHFA, HUD, and Treasury.  I think the Administration is smart to move this initiative forward as they certainly have the political cover through last year’s RFI process.  They asked for comments and suggestions and reportedly received thousands of responses.  They can now say we are implementing what America said they wanted.   Of course, we do not yet know exactly how it will work.
 
Lawmakers and mortgage industry professionals have previously questioned whether or not FHA can handle yet another herculean task.  Recall in 2007 when the mortgage market sputtered and into 2008 when new higher loan limits were unveiled, FHA saw its share of the mortgage market jump exponentially in a matter of months. What was a $350 billion book of business in 2005 has today mushroomed to $1 trillion with more than 7.4 million homes with FHA insurance.
 
Since presumably these would be riskier borrowers (higher LTVs and underwater) it remains to be seen:

  1. If Congress will give FHA the authority to increase its current LTV caps.
  2. How OMB will “score” the proposal thus dictating the mortgage insurance pricing?
  3. Will proposed new bank fees and presumably higher premium revenue off-set the expected “cost” to FHA?

FHA is reportedly considering placing these loans in an insurance fund separate from its current Single Family books of business, but could ultimately require the FHA to invoke its “permanent indefinite” budget authority to keep it afloat (as opposed to the self-sustaining Mutual Mortgage Insurance fund).
 
That said, the Administration indicated the cost of these programs will “not add a dime to the deficit” and will be off-set by a fee on the “Largest Financial Institutions.”  (Note: Congress might have an opinion here.)
 
Since FHA has not in recent memory refinanced borrowers with LTVs in the 120-140 range (presumably one of the groups targeted by the Administration), I think it will be difficult to estimate the performance of these loans over time and thus their impact on FHA’s actuarial foundation regardless of which fund they place them in.  While the FHA “short re-finance” program announced in 2010 allowed a 115% CLTV, it has had very little participation thus making it difficult to gauge performance relative to what could be even higher LTV participants.
 
It should be noted that the Administration is targeting borrowers who have made 12 consecutive payments so one could argue that despite the fact they are underwater they have been able to afford their mortgage payments – presumably in some cases for several years.  So does that mitigate some of the potential risk meaning that they will certainly be able to afford reduced monthly payments?  But again, given FHA’s limited experience with borrowers outside their established guidelines and requirements predicting their performance with any degree of certainty is difficult at best.
 
And assuming those previously non-FHA borrowers default on their new FHA loan, who do you think will now be at-risk with an underwater property?  Again, the Administration stated these programs “will not add a dime to the deficit” – I hope they are right.
 
FHA’s actuarial soundness has been rocked by the on-going erosion of house prices nationwide which has led to three consecutive years of declines in their capital reserve ratio.  The best medicine for FHA is house price appreciation and the positive ripple effect of increased value to their housing portfolio.  But they have been waiting three years for that to happen.
 
Welcomed news as part of this new refinance program is they would be removed from an FHA lender’s compare ratio within Neighborhood Watch (FHA’s public database of lender’s default rates compared to its peers in a given geographic region).  That said, I suspect FHA will establish a separate category of compare ratios for this book of business, as it did for Negative Equity Refinances and the Hope For Homeowner (H4H) program.
 
So while this action will remove a potential barrier to participation, lenders should be cautioned that performance will still matter and they should stand ready for increased scrutiny especially by the HUD OIG.
 
I give the Administration credit for launching another round of housing assistance as too many homeowners continue to struggle.  Putting politics aside on the surface it appears to be the right and proper thing to do, however it remains to be seen the level of participation (and degree of Congressional acceptance) and ultimately what cost, if any, to the taxpayers – most of which have grown weary of the nagging housing crisis.
 
Note: We will continue to follow this initiative with keen interest as it makes its way through Congress and will offer periodic updates as developments warrant.

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Currents | Q&A: An Online Database of Hazardous Building Materials

An architect and an interior designer have created an online database of hazardous building materials.



CFPB Unveils Complaint Database; Soon to Include Mortgages

The Consumer Finance Protection Bureau (CFPB)
rolled out another new consumer tool this morning, an on-line complaint
database
.  The database, currently in
beta format, provides loan-level information on complaints logged with the
Bureau by customers. The database is currently limited to complaints regarding
credit cards but the Bureau intends to expand it to include mortgages, payday loans,
and other consumer financial products.

There is no information that in any way identifies
the consumer, but the company issuing the card is identified as well as the
type of complaint (billing dispute, interest rate, collection practices, etc).  Other information includes the steps taken in
resolving the complaint, tracking dates and the current status of the
complaint. The accessibility of the information will allow consumers to track their
complaints (with an identifying number) and permit the public to judge the
actions of the bureau as well as assess the manner in which companies handle
and resolve disputes.  

Credit card companies are expected to
respond to consumer complaints within 15 days and to resolve all but the most
complicated issues within 60 days.  The
database indicates whether the dispute has been handled in a “timely” manner
and whether the customer has accepted the card company’s action.

The beta version of the site contains
information only on complaints received after June 1 however the Bureau intends
to backfill information once the full version of the program is on-line.

CFPB’s website said, “No longer will
consumer complaints only be known to the individual complainant, bank,
regulator, and those in the public willing to pursue this information through
the Freedom of Information Act. Instead this data-rich window into consumer
financial issues will be widely available to everyone: developers,
policymakers, journalists, academics, industry, and you. Our goal is to improve
the transparency and efficiency
of the credit card market to further empower
American consumers.”

ABA’s Response:

Kenneth Clayton, ABA’s executive vice president of legislative affairs and chief counsel

“While our industry stands ready to work with the CFPB to
resolve customer concerns, the Bureau’s plan to release unverified data
is disappointing and could mislead consumers.  Publishing allegations is
often different than publishing facts.  The Bureau itself acknowledges
the complaints could be inaccurate, and in fact plans to disclaim their
accuracy.*  This makes the proposed database a questionable – even
misleading – resource and risks tarnishing the reputation of individual
companies without substantiation.

“Complaint
resolutions are best handled in a fair and unbiased manner between the
parties involved.  Where regulators believe process problems exist, they
have ample authority to correct them.  Publicizing allegations that may
or may not have any basis in fact raises serious questions about the
balanced review we expect from our government agencies.  It feeds the
perception that the Bureau wishes to politicize the process rather than
analyze the facts involved.

“The banking industry takes every complaint seriously and
works every day to resolve customer issues.  We’re proud of the
customer service we provide and the numbers speak for themselves.  Of
the more than 383 million credit card accounts in the U.S., less than
one-hundredth of one percent have submitted a complaint to the Bureau. 
Customer satisfaction will always be our industry’s top priority.”

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Mortgage Fraud Rates Show Some Purchase/Refi Correlation

Interthinx, a provider of comprehensive risk mitigation solutions, has released its 12th quarterly report and its Mortgage Fraud Index which measures four types of fraud common to the mortgage industry.  The composite index for the first quarter of 2012 which is derived from the four underlying indices, dropped to 139, its lowest point since the second quarter of 2009.  This represented a change of -4.3 percent from the fourth quarter of 2012 and -3.1 percent from one year ago.

Nevada returned to the role of “riskiest state” after being displaced by Arizona in the fourth quarter.  Arizona fell to second place followed by Florida, New Jersey, and California.

Much of the report centers on those metropolitan statistical areas (MSAs) with the highest fraud risk.  Two MSAs in Florida, Cape Coral and Miami occupy the first and second spots with composite risk scores of 248 and 241 respectively.  They are followed by Modesto and Chico, California and Las Vegas. 

The report notes significant movement among MSAs as to the levels of fraud, the types of fraud, and their relative positions in the rankings since the previous quarter.  For example, Stockton, California had been the riskiest city for three consecutive quarters but saw a 24 percent decrease from the fourth quarter of 2011 to drop to 7th place. 

The Property Valuation Fraud Index was 213, down 11.8 percent from the previous quarter and 4.7 percent from one year earlier.  Property Valuation Fraud is perpetrated by manipulating property values to create false equity which can be used for various purposes.  Florida led the nation in this type of fraud with five metropolitan areas (MSAs) in that state making in the top ten.  Cape Coral Florida had an index of 482, more than twice the national value, a major reason why it was also the riskiest MSA overall.  Las Vegas was second with an index of 440, but every MSA in the top ten had an index score of at least 401.  

The Identity Fraud Index was 140, down 2.2 percent from the fourth quarter of 2011 and 24.4 percent from the first quarter of 2011.  Identify fraud is frequently used in schemes to hide the identity of the offender and to obtain a credit profile that will meet lender guidelines.  The hot spot for this fraud was San Jose, California with an index of 293; Detroit was second and Ann Arbor, Michigan was in third place.

The Occupancy Fraud Index finished the quarter at 61, 23.2 percent lower than one year ago and down 2.1 percent from the previous quarter.  Offenders commit occupancy fraud by falsely claiming they intend to occupy the property they are purchasing in order to obtain a mortgage with a lower down payment or a lower interest rate.  Miami was the riskiest for this fraud, moving from second to first place even though its score of 104 was a decrease of 23.6 percent from the previous quarter.  Other MSAs appearing high on this list were Jacksonville, North Carolina; and Flint, Michigan.

The fourth type of fraud is measured by the Employment/Income Fraud Index.  This occurs when a mortgage applicant misrepresents income in order to meet underwriting guidelines.  Nationally this fraud risk has increased 18.1 percent over the last year and 4.5 percent from the fourth quarter of 2011.  Burlington, Vermont leads in this category of fraud risk with an index of 271, 80 points higher than San Diego which was in second place.  Eight out of the remaining nine MSAs in the top ten for this type of fraud are in California.

As interest rates declined the composition of loan applications in the Interthinx database have changed from a nearly 60:40 split between purchases and refinances in Q2 2011 to a 40:60 split in the first quarter of 2012.  The geographic changes that may have been caused by the composition shift were extremely granular in nature; however the type-specific risk indices did show some significant trends, especially in Identity and Occupancy Fraud Risk which saw decreases of 22 and 23 percent respectively and the Employment/Income category which increased 18 percent.  Both indices that decreased have lower values for refinances relative to purchases while the reverse is true for the Employment index.  Interthinx speculates that at least part of the major type-specific trends over the last year may be related to a change in loan composition. 

Interthinx maintains that its indices have proven to be reliable leading indicates of default and foreclosure activity therefore it advises that areas that bear watching going forward are Nevada and Arizona, the two riskiest MSAs in Florida, Cape Coral and Miami, and the New York Tri-State area where risk is rising in all three states, New York, New Jersey, and Connecticut.

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