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Reply #70: Putting “trust” back in American housing finance [View All]

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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat May-21-11 08:01 AM
Response to Reply #68
70. Putting “trust” back in American housing finance /

News reports suggest that New York prosecutors are preparing fraud charges against a number of large investment banks for defrauding insurance companies with respect to mortgage loans. These allegations and many civil claims with precisely similar predicates illustrate one of the most important aspects of the subprime financial crisis, namely the construction and collapse of the non-bank financial sector...The subprime investment vehicles of 2007 were almost precise copies of the trusts employed in the years leading up to the Great Crash of 1929. The investment trusts of the early 1900s were often fraudulent vehicles used by Wall Street to enrich the sponsors and stiff investors — like many private deals done during the past decade. Railroad trusts and other seemingly reputable issuers of debentures were highly unpredictable and the assets underlying a trust were always opaque. There was no SEC and no public disclosure standards to provide even minimal information to investors about the assets inside a trust. And the Robber Barons owned the courts, too.

In 1925, during the laissez faire presidency of Calvin Coolidge, the progressive Chief Justice of the Supreme Court, Louis Brandeis, laid down the law on the assignment of all collateral, from commercial receivables to mortgage notes...In plain terms... an assignment of collateral is deficient without “the effective disposition of title and creation of a lien.” A financial transaction involving security that lacks these features “imputes fraud conclusively,” wrote Brandeis. Indeed, by that measure, many mortgage backed securities (MBS) created over the past few decades are fraudulent as a matter of law.... The creation of the ersatz housing title registry, Mortgage Electronic Registration Systems (MERS), by the banking and mortgage servicing industry was effectively an end-run around the clear legal standard set by Brandeis. In litigation and foreclosures, these make-believe standards for securitizing home loans are turning into dust in the hands of the banks and investors. Lenders who relied upon MERS to document their secured interest in a mortgage are increasingly at risk when the title is contested...

In more and more cases where the supposedly secured party cannot produce a properly endorsed mortgage note, the courts are ruling in favor of the debtor. Experts in the fields of the law and forensic accounting tell me that missing or nonexistent mortgages leave investors effectively unsecured — and leave debtor homeowners unsure about the identity of the true note holder...A very troubling issue... is related to the issue of missing documents, namely the growing number of foreclosure cases where a mortgage was pledged multiple times. One of the dirty little secrets about MERS and the use of electronic registry systems generally is that they enable fraud. A bank or non-bank seller can pledge the same loan as collateral multiple times if there is no hard requirement to deliver the physical note as per Benedict, which is an open invitation to fraud.

There are a number of proposals in Congress at present for fixing the private mortgage finance sector, but virtually none address the issue of what constitutes a good sale or pledge of a mortgage note in the US...One thing you can depend upon is that there will be no fixing of what is wrong with the US real estate sector until Congress addresses once and for all the issue of delivery of a note as collateral for a mortgage backed security. Unless, and until, we fix the private mortgage securitization market, the housing sector will not stabilize and the chance of further deflation will remain a threat to economic recovery.

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