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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Geithner Outlines Accomplishments, Future of Financial Reform

Treasury Secretary Timothy Geithner told
the Financial Stability Oversight Council that the financial system is getting
stronger and safer and that much of the excess risk-taking and careless
financial practices that caused so much damage has been forced out.  However, he said, “These gains will erode
over time if we are not able to put our full reforms into place.”

He outlined the basic framework has been
laid, with new global agreements to limit leverage, rules for managing the
failure of a large firm and the new Consumer Financial Protection Bureau (CFPB)
up and running, and the majority of the new safeguards for derivatives markets proposed.  Geithner ticked off the major accomplishments
of reform.

First, banks now face much
tougher limits on risk which are critical to reducing the risk of large
financial failures and limiting the damage such failures can cause.  The focus in 2012 will be “on defining the
new liquidity standards and on making sure that capital risk-weights are
applied consistently.”

 The new rules are tougher on
the largest banks that pose the greatest risk and are being complemented by
other limits on risk-taking such as the Volcker Rules and limits on the size of
firms and concentration of the financial systems.  These will not apply only to banks but to
other large financial institutions that could pose a threat to financial system
stability and this year the Risk Council will make the first of these
designations.

Second, the derivatives market will,
for the first time, be required to meet a comprehensive set of transparency
requirements, margin rules and other safeguards.  These reforms are designed to move
standardized contracts to clearing houses and trading platforms and will be
complemented with more conservative safeguards for the more complex and
specialized products less amenable to central clearing and electronic
trading.  These reforms, the balance of
which will be outlined this year, will lower costs for those who use the
products, allow parties to hedge against risk, but limit the potential for
abuse, the Secretary said. 

Third, is a carefully designed set
of safeguards against risk outside the banking system and enhanced protections
for the basic infrastructure of the financial markets: 

  • Money market funds will have new
    requirements designed to limit “runs.”
  • Important funding markets like the
    tri-party repo market are now more conservatively structured.
  • International trade repositories are
    being developed for derivatives, including credit default swaps.
  • Designated financial market utilities
    will have oversight and requirements for stronger financial reserves;

Fourth; there will be a stronger set
of protections in place against “too big to fail” institutions.  The key elements are:

  • Capital and liquidity rules with
    tough limits on leverage to both reduce the probability of failure and prevent
    a domino effect;
  • New protections for derivatives,
    funding markets, and for the market infrastructure to limit contagion across
    the financial system;
  • Tougher limits on institutional size;
  • A bankruptcy-type framework to
    manage the failure of large financial firms.
    This “resolution authority” will prohibit bailouts for private
    investors, protect taxpayers, and force the financial system to bear the costs
    of future crisis.

Fifth, significantly stronger
protections for investors and consumers are being put in place including the
CFPB which is working to improve disclosures for mortgages and credit cards and
developing new standards for qualified mortgages.  New authorities are being used to strengthen protections
for investors and to give shareholders greater voice on issues like executive
compensation.

Geithner pointed to the failure of
account segregation rules to protect customers in the MF Global disaster as proof
of the need for more protections and said that the Council will work with the
SEC and the Commodity Futures Trading Council on this problem.   

Moving forward, reforms must be
structured to endure as the market evolves and to work not just in isolation
but to interact appropriately with each other and the broader economy.  “We
want to be careful to get the balance right-building a more stable financial
system, with better protections for consumers and investors, that allows for
financial innovation in support of economic growth.” 

First, he said, we have to make sure
we have a level playing field at home; that financial firms engaged in similar
activity and financial instruments that have similar characteristics are
treated roughly the same because small differences can have powerful effects in
shifting risk to where the rules are softer. 
A level field globally is also important, particularly with reforms that
toughen rules on capital, margin, liquidity, and leverage, as well as in the
global derivatives markets.  “In these areas we are working to discourage
other nations from applying softer rules to their institutions and to try to
attract financial activity away from the U.S. market and U.S. institutions.” 

It is necessary to align the
developing derivatives regimes around the world; preventing attempts to soften
application of capital rules, limiting the discretion available to supervisors
in enforcing rules on risk-weights for capital and designing rules for
resolution of large global institutions.  Also, because some U.S. reforms are different
or tougher from rules in other markets, there needs to be a sensible way to
apply those rules to the foreign operations of U.S. firms and the U.S.
operation of foreign firms.

 The U.S. also needs to move
forward with reforms to the mortgage market including a path to winding down
the government sponsored enterprises (GSEs.) 
The Administration has already outlined a broad strategy, Geithner said,
and expects to lay out more detail in the spring.  The immediate concern is to repair the damage
to homeowners, the housing market, and neighborhoods.  The President spoke this week about the range
of tools he plans to use.  Our ultimate goals
are to wind down the GSEs, bring private capital back into the market, reduce
the government’s direct role, and better target support toward first-time
homebuyers and low- and moderate-income Americans.

Geithner said the new system must
foster affordable rentals options, have stronger, clearer consumer protections,
and create a level playing field for all institutions participating in the
system.  For this to happen without
hurting the broader economy and adding further damage to those areas that have
been hardest hit, banks and private investors must come back into the market on
a larger scale and they want more clarity on the rules that will apply. 

Credit availability is still a problem
and there is a broad array of programs in place to improve access to credit and
capital for small businesses.  As
conditions improve, it is important that we remain focused on making sure that
small businesses, a crucial engine of job growth, have continued access to
equity capital and credit.

Many Americans trying to buy a home
or refinance their mortgage are also finding it hard to access credit, even for
FHA- or GSE-backed mortgages.  The Administration has been working closely
with the FHA and FHFA to encourage them to take additional measures to remove
unnecessary barriers and they are making progress.  They will probably outline additional reforms
in the coming weeks.

Bank supervisors, in the normal
conduct of bank exams and supervision, as well as in the design of new rules to
limit risk taking and abuse, must be careful not to overdo it with actions that
cause undue damage to the availability of credit or liquidity to markets.

Geithner said the U.S. financial
system is getting stronger
, and is now significantly stronger than it was
before the crisis.  Among the achievements:

  • Banks have increased common equity
    by more than $350 billion since 2009.
  • Banks and other financial
    institutions with more than $5 trillion in assets at the end of 2007 have been
    shut down, acquired, or restructured.
  • The asset-backed commercial paper
    market has shrunk by 70 percent since its peak in 2007, and the tri-party repo
    market and prime money market funds have shrunk by 40 percent and 33 percent
    respectively since their 2008 peaks.
  • The financial assistance we provided
    to banks through TARP, for example, will result in taxpayer gains of
    approximately $20 billion.

The Secretary said the strength of
the banks is helping to support broader economic growth, including the more
than 3 million private sector jobs created over 22 straight months, and the 30
percent increase in private investment in equipment and software.  
Broadly, the cost of credit has fallen significantly since late 2008 and early
2009.  Banks are lending more, with commercial and industrial loans to
businesses up by an annual rate of more than 10 percent over the past six
months.  

He concluded by saying that no
financial system is invulnerable to crisis, and there is a lot of unfinished
business on the path of reform.  The reforms are tough where they need to
be tough.  “But they will leave our financial system safer, better able to
help businesses raise capital, and better able to help families finance safely
the purchase of a house or a car, to borrow to invest in a college education,
or to save for retirement.  And they will protect the taxpayer from having
to pay the price of future crisis.”

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White House Details Housing Plans

Saying that the housing crisis struck right at the
heart of what it means to be middle class, President Barack Obama has begun to
flesh out the housing-related proposals he made in his State of the Union
speech last Tuesday.  He spoke this
morning at Falls Church, Virginia about his housing plans, some pieces of which
have already been put into effect by the Departments of Justice (DOJ),
Treasury, and Housing and Urban Development (HUD) in the eight days since they
were first announced. The President spoke only briefly and most of the
information about his proposals comes from a Fact Sheet released by the White
House just before his speech.

The most ambitious part of the Administration’s
housing plan is the expansion of several existing programs to streamline
refinancing for homeowners
with existing high interest rate government or
Fannie Mae/Freddie Mac mortgages. The President wants to extend these
opportunities to homeowners with standard conforming non-FHA, VA, or GSE
mortgages through a new program run through FHA.  To be eligible the homeowner would have meet
a few simple criteria:

  • Borrowers will need to have been
    current on their loan for the past 6 months and have missed no more than one
    payment in the 6 months prior.
  • Borrowers must have a current FICO
    score of 580 to be eligible, a requirement met by approximately 9 in 10 borrowers.
  • The loan
    they are refinancing is for a single family, owner-occupied principal residence.

A
streamlined application process will make it simpler and less expensive for
both borrowers and lenders.  Borrowers
will not be required to submit a new appraisal or tax return, merely verify
current employment.  Those who are not
employed may still be eligible if they meet the other requirements and present
limited credit risk, however, a lender will need to perform a full underwriting
of those borrowers.

The President’s plan includes
additional steps to reduce program costs, including working with Congress to establish
risk-mitigation measures including requiring lenders interested in refinancing
deeply underwater loans to write down the balance of these loans before they
qualify.   There would be a separate fund created for the program to help
the FHA track and manage the risk involved and ensure that it has no effect on
the operation of the existing Mutual Mortgage Insurance (MMI) fund.  The estimated $5 to $10 billion cost of the program would be paid by a fee on the
largest financial institutions based on their size and the riskiness of their
activities

There were
also some changes suggested for GSE refinancing programs.  President Obama said he believed the steps he
proposes are within the existing authority of the FHFA but the GSEs have not
acted so he is calling on Congress to:

  • Eliminate appraisal costs for all borrowers by using mark-to-market
    accounting or other alternatives to manual appraisals where Automated Valuation
    Models cannot be used to determine loan-to-value ratios.
  • Direct the GSEs to require the same
    streamlined underwriting for new servicers as they do for current servicers to
    unlock competition and lower borrowing costs.
  • Extend streamlined refinancing to
    all GSE borrowers including those with significant equity in their home.

There are also proposals to streamline refinancing for
borrowers in the USDA and FHA housing programs but the White House noted that
the current FHA-to-FHA streamlined refinancing program has met with some
resistance from lenders who are afraid to make loans that might compromise their
FHA approved lender status.  FHA is
removing these loans from their “Compare Ratio” process which should open the program
up to more borrowers.

Borrowers utilizing either the Home
Affordable Refinancing Program (HARP) or the new FHA-based program would be
given an alternative to allow them to rebuild the equity in their home.  This option would require refinancing into a
20 year mortgage and the homeowner would continue to make the old mortgage
payment.  The excess money would be
applied directly to principal that, along with the shorter term would allow the
homeowner to quickly rebuild equity.  To
encourage borrowers to make this choice (which also reduces lender risk) the
administration is proposing legislation to provide for the GSEs and FHA to
cover the loans’ closing costs.

A
Homeowner Bill of Rights proposed by the Administration would apply to the mortgage
servicing system which the White House said “is badly broken and would benefit
from a single set of strong federal standards.” 
Among the items proposed for this Bill of Rights are:

  • Simple,
    Easy to Understand Mortgage Forms
  • Disclosure of all known fees and
    penalties
  • No conflicts of interest between
    servicers and investors or servicers and junior lien holders.
  • Assistance
    for at-risk homeowners to include early intervention, continuity of contact,
    and time and options to avoid foreclosure.
  • Safeguards
    against inappropriate foreclosure including the right of appeal, certification
    of proper process.

The President plans to include $15 billion in his Budget for
a national effort to hire construction workers to rehabilitate hundreds of
thousands of vacant and foreclosed homes and businesses
.  Similar to the Neighborhood Stabilization
Program, Project Rebuild will enlist expertise and capital from the private
sector, focus on property improvements, and expand property solutions like land
banks.  The Budget will also provide $1
billion in funding for the Housing Trust Fund to finance the development of
affordable housing for extremely low income families while providing jobs in
the construction industry.  

Other initiatives which the
President talked about this morning or which were covered in the White House
Fact Sheet have already been launched in the last few days including a joint
investigation
with the states into mortgage origination and servicing abuses, expansion
of eligibility criteria for HAMP and increased incentives for lenders in the
program to reduce principal balances, and a pilot sale announced to transition
foreclosed properties into rental housing in certain highly distressed
communities which was announced by HUD this morning

The White
House said that, while the government cannot fix the
housing market on its own, the President believes that responsible homeowners
should not have to sit and wait for the market to hit bottom to get relief when
there are measures at hand that can make a meaningful difference, including
allowing these homeowners to save thousands of dollars by refinancing at
today’s low interest rates.

Conventional wisdom holds that the
President’s proposals will be “dead on arrival” when they reach Congress and,
in fact the reaction of Speaker
of the House John Boehner to the speech was, “How many times are we going to do
this?  How many times are we going to
suggest programs to help people who can’t make payments on their
mortgages?  The programs don’t work.”

A
kinder assessment was released in a statement from David H. Stevens, President
and CEO of the Mortgage Bankers Association. 
Stevens commented specifically on the Homeowner Bill of Rights saying
the Association agrees that a single national set of standards “can help
provide confidence and certainty in the real estate market for borrowers,
lenders, and servicers alike.”

He
also commended the administration for “recognizing that more can be done to get
our housing market on track.  The programs announced today will give lenders and other
stakeholders additional tools to help borrowers and foster a renewed confidence
in our real estate finance system.” 
 

Video Included

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Obama proposes home-loan refinancing plan

President Barack Obama proposed a plan aimed at helping millions of homeowners refinance their mortgages to today’s historically-low rates. To pay for it though, he’ll need $5 billion to $10 billion.

Housing Industry Reacts to State of the Union

Housing featured prominently in
President Obama’s State of the Union speech on Tuesday night.  The President made two specific proposals,
one to deal with the ghosts of housing past, the other to provide expanded
credit to homeowners.

In contrast to the settlement with banks
that Obama was widely rumored to announce
at the State of the Union, he instead directed Attorney General Eric Holder to
create a new office on Mortgage Origination and Securitization Abuses.  The President said, “The American people
deserve a robust and comprehensive investigation into the global financial meltdown
to ensure nothing like it ever happens again.”

According to the Huffington Post, the new
office will take a three-pronged approach to the issue, holding financial
institutions accountable for abuses, compensating victims, and providing relief
for homeowners, and will operate as part of the existing Financial Fraud
Enforcement Task Force.  On Wednesday several
news outlets were reporting that the unit will be chaired by State Attorney
General Eric Schneiderman, who has been regarded as among the toughest of state
law enforcement officers with Lanny Breuer, an assistant attorney general in
the Criminal Division of the Department of Justice (DOJ) as co-chair.  Others reported to be in the group are Robert
Khuzami, director of enforcement at the Securities and Exchange Commission,
U.S. Attorney for Colorado John Walsh and Tony West, assistant AG, DOJ. 

The President’s second and more
broad-reaching proposal was for a massive refinancing of mortgage loans that
would reach beyond the current government initiates such as the Home Affordable
Refinance Program (HARP).  While few
details are available, the President said that his proposed initiative would
cut red tape and could save homeowners about $3,000 a year on their mortgage
payments because of the current historically low rates.  Unlike HARP, the program would apply to all
borrowers whether or not their current mortgages are government-backed and
would be paid for by a small fee on the largest financial institutions. Obama
did not mention principal reduction in his proposal.

Bloomberg is reporting that the program is
Obama’s response to a call by Fed Chairman Ben Bernanke in a paper sent to Congress
earlier this month for the administration to offer more aid for housing.   While largely dealing with the need to
convert excess housing inventory to rental property, the paper also touched on
the benefits of easing refinancing beyond the HARP program.

Bloomberg also outlined some of the
tradeoffs of a super-refinancing program saying it may damage investors in
government-backed securities by more quickly paying off those with high coupons
and limited default risk while aiding holders of other home-loan securities and
banks.  Word that such a proposal might be
forthcoming in the President’s speech, Bloomberg said, “Roiled the market for
Fannie Mae and Freddie Mac securities according to a note to clients by Bank of
America Corp.”

The Associated Press quoted Stan
Humphries, chief economist at Zillow as saying the refinancing could allow 10
million more homeowners to refinance and, by preventing foreclosures and
freeing up money for Americans to spend, could give the economy a $40 to $75
billion jolt.  The Federal Reserve, the
AP said, was more cautious, estimating that 2.5 million additional homeowners
might be able to refinance.

The refinancing initiative would require
approval by Congress, however the day after the speech the focus was on other issues
such as tax reform and we could not find any reaction from members of Congress
specific to the refinancing issue.  Even the
Mortgage Bankers Association (MBA) issued a statement from its president David
H. Stevens which did not mention the refinancing program, obliquely addressing
instead the creation of the mortgage fraud office.    

“Like the
President, we believe it is time to move forward with rebuilding this nation’s
housing market and that lenders and borrowers alike contributed to the housing
crisis we are currently in.  Let there also be no mistake, those who
committed illegal acts ought to face the consequences, if they haven’t already.”

Stevens
then called for a clear national housing policy “that establishes certainty for
lenders and borrowers alike.”  This,
according to MBA, requires finalizing the Risk Retention/Qualified Residential
Mortgage (QRM) rule “in a way that ensures access to credit for all qualified
borrowers,” establishing working national servicing standards, developing a
legal safe-harbor for Dodd-Frank QRM/Ability to Repay requirements, and “Move(ing)
quickly to determine the proper role of the federal government in the mortgage market
in order to ensure sufficient mortgage liquidity through all markets, good and
bad.

Creation
of the fraud office generated substantial comment, much of which was
unfavorable.  A lot of the criticism
focused on the lack of prosecutions that have emerged from the existing fraud
task force and there was a strong suspicion voiced by the liberal blogosphere
that the new office was merely a cover for pushing the DOJ/50-state attorneys
general settlement with major banks.  However,
one analysis, written by Shahien Nasiripour in U.S. Politics and Policies pointed out the wider powers of
enforcement available to attorneys general in some states such as New York’s
Martin Act and how the states and federal government might use the new office
to pool their powers and responsibilities to the benefit of each.  

The new
office will not lure California Attorney General Kamala Harris back into the
fold.  Harris and Schneiderman both
withdrew from the national foreclosure settlement last year, feeling that it
did not represent the interest of their respective states.  Despite the appointment of Schneiderman to
head the new office, Harris announced on Wednesday that she would not be
rejoining her fellow AGs
in their negotiations saying that the latest
settlement proposal was inadequate for California.  A spokesman for her office said, “Our
state has been clear about what any multistate settlement must contain:
transparency, relief going to the most distressed homeowners, and meaningful
enforcement that ensures accountability. At this point, this deal does not
suffice for California.”

Here’s the video of the speech beginning at the point discussing housing related issues…

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