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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:
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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.
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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.
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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.
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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.
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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.
...(read more)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."
...(read more)HOPE NOW Conference Focused on Military Families, Mediation
HOPE NOW, the voluntary private sector alliance of mortgage industry stakeholders, recently concluded a two day conference in Washington which focused on assistance to military homeowners and foreclosure mediation.
One group of servicers, investors, and housing counselors met with regulators, investors, and members of the military to discuss ways of reaching military families facing foreclosure because of their unique situation which includes Permanent Change of Station and other issues. A second group of HOPE NOW stakeholders met with judges, attorneys, and several state housing agencies to discuss best standards related to foreclosure mediation.
John Dalton, President of the Housing Policy Council, former Secretary of the Navy, and a panelist at the conference said "The current housing crisis has created a separate set of challenges for homeowners in the military. In order to assist these families, the Housing Policy Council,... developed several documents, including one that outlines a single point of contact for personal finance managers, housing relocation managers and JAGs (military attorneys) as they work together to save homes for families serving our country." The documents, he said, will be implemented across the armed forces.
Faith Schwartz, Executive Director, HOPE NOW said that her organization, in cooperation with the military, has identified at least four military bases for face to face outreach events during the first half of the year and additional bases may be added during 2012. "We look forward to the opportunity to assist military families and we hope to help solve gaps in the process that will be addressed through specialized outreach activities and streamlined processes," she said.
Schwartz added, "We are also encouraged by the efforts of our members to improve the foreclosure mediation process and create standards that allow for quicker resolutions and better communication between servicers and homeowners."
...(read more)Reports Continue to Show Home Price Declines
CoreLogic and Lender Processing Services (LPS) have each released their most recent Home Price Indices. CoreLogic's HPI covers December; LPS's covers the month of November. Here is a quick review of each.
LPS found that the average home price for transactions during November was $199.000, down 0.6 percent from the October average. This is the fifth consecutive month that this index has declined. Preliminary information on December sales indicates that the HPI might have lost another 0.8 percent during that month.
When the market peaked in June 2006 the total value of the U.S. housing inventory covered by LPS was $10.8 trillion. The value has declined 30.6 percent to $7.5 trillion since that time.
Price changes were consistent across the country, increasing in 13 percent of the ZIP Codes in the database. Higher priced homes had somewhat small price declines than those in the middle and low price categories with the range from high to low covering only 13 basis points.
CoreLogic issues two sets of indices, one including sales of distressed properties, the other excluding those sales. The HPI for all sales decreased 1.4 percent in December and was down 4.7 percent on an annual basis, the fifth year in a row that this HPI has declined. The Index covering market sales was 0.9 percent higher than in December 2010 which, Core Logic says, gives an indication of the impact distressed sales are having on the market. The HPI excluding distressed sales posted its first month -over-month gain since last July, rising 0.2 percent.
Of the top 100 Core Based Statistical Areas as measured by population, 81 showed year-over-year declines in November compared to 80 that were down on a monthly basis in November compared to October.
...(read more)Homeowners Continue Shift Away from Cash-Out Refinancing
Homeowners who refinanced their homes during the fourth quarter of 2011 either refinanced for about the same amount or actually brought cash to the table according Freddie Mac. Fewer than 15 percent of those who refinanced during the quarter increased their loan amount by 5 percent or more. This is the lowest percentage of "cash-out" borrowers in the 26 years that Freddie has been tracking the statistics. During those 26 years covering 1985 to 2010 the average percentage of cash-out borrowers was 46 percent.
Thirty-seven percent of refinancing homeowners took out new loans of approximately the same size as the old loan but nearly half (49 percent) actually brought cash to the table, reducing the amount of the new loan to a median ratio of .74 of the old loan. The percentage of "cash-in" borrowers is also a 26-year record.
The fourth quarter figures are a stark contrast to the pattern of refinancing during the last years of the housing boom. During eight consecutive quarters (Q4 of 2005 to Q3 of 2007) cash-out loans exceeded 80 percent of all refinancing and in none of those quarters did more than 8 percent of homeowners reduce the size of their mortgages when refinancing.
Borrowers who refinanced achieved a new interest rate about 1.4 percentage points lower than their old mortgage, a 26 percent improvement. These borrowers will save a median of $2,700 during the first year if they have a $200,000 loan.
The 15 percent who did cash out took an estimated $5.5 billion in net equity out of their homes, representing 3.0 percent of the total refinanced. This was down from $5.6 billion and 3.7 percent in the third quarter. Adjusted for inflation this was the lowest level since the third quarter of 1995. During the peak period for cash-out refinancing, the second quarter of 2006, homeowners cashed out $83.7 billion through refinancing, 31.1 percent of the total value of all transactions.
Freddie Mac said that the mortgages refinanced had been in place for a median of four years and the underlying collateral had decreased in value by a median of 4 percent during that time. The Freddie Mac House Price Index shows about a 23 percent decline in its U.S. series during that four year period. Thus, Freddie Mac says, "Borrowers who refinanced in the fourth quarter owned homes that had held their value better than the average home, or may reflect value-enhancing improvements that owners had made to their homes during the intervening years." This statement does not seem to recognize the possibility these borrowers had been able to refinance solely because their homes had held value and thus self-selected their loans for analysis.
...(read more)SEC Names Ex-Credit Suisse Employees in Subprime Fraud Scheme
Four former investment bankers and traders from the Credit Suisse Group were charged by the Securities and Exchange Commission (SEC) Wednesday violating multiple sections of the Securities Exchange Act of 1934 while trading in subprime mortgage bonds. The indictments allege the four engaged in a complex scheme to fraudulently overstate the prices of $3 billion of the bonds during the height of the subprime credit crisis.
The four are Kareem Serageldin, the group's former global head of structured credit trading; David Higgs, former head of hedge trading; and two traders, Faisal Siddiqui and Salmaan Siddiqui. According to the complaint filed in U.S. District Court for the Southern District of New York, Serageldin oversaw a significant portion of Credit Suisse's structured products and mortgage-related businesses. The traders reported to Higgs and Serageldin.
The SEC charges that the four deliberately ignored specific market information showing that prices of the subject bonds were declining sharply, pricing them instead in a way that allowed Credit Suisse to achieve fictional profits, and, through the traders, changing bond prices in order to hit daily and monthly profit target and cover losses. The scheme was driven in part by the prospect of lavish year-end bonuses and promotions. The scheme hit its peak at the end of 2007.
"The stunning scale of the illegal mismarking in this case was surpassed only by the greed of the senior bankers behind the scheme," said Robert Khuzami, Director of the SEC's Division of Enforcement and a Co-Chair of the newly formed Residential Mortgage-Backed Securities Working Group, "At precisely the moment investors and market participants were urgently seeking accurate information about financial institutions' exposure to the subprime market, the senior bankers falsely and selfishly inflated the value of more than $3 billion in asset-backed securities in order to protect their bonuses and, in one case, protect a highly coveted promotion."
SEC explained that it was not charging Credit Suisse in the scheme because the wrongdoing was isolated; Credit Suisse reported the violations to the SEC, voluntarily terminated the four, implemented internal controls to prevent additional misconduct, and cooperated with SEC in the investigation. The SEC said that the four named in the complaint also cooperated in the investigation and that assistance was provided by the FBI, the U.S. Attorney's Office for the Southern District of New York and the United Kingdom Financial Services Authority.
...(read more)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."
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