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Homeowners’ Rebellion: Homes Foreclosure-Proof?

Mortgages bundled into securities were a favorite investment of speculators at the height of the financial bubble leading up to the crash of 2008 The securities changed hands frequently, and the companies profiting
from mortgage payments were often not the same parties that negotiated
the loans. At the heart of this disconnect was the Mortgage Electronic
Registration System, or MERS ,
a company that serves as the mortgagee of record for lenders, allowing
properties to change hands without the necessity of recording each

That means hordes of victims of predatory lending could end up owning
their homes free and clear-while the financial industry could end up
skewered on its own sword.

California Precedent

The latest of these court decisions came down in California on May 20, 2010, in a bankruptcy case called In re Walker, Case no. 10-21656-E-11. The court held that MERS could not foreclose because it was a mere nominee; and that as a result, plaintiff Citibank could not collect on its claim. The judge opined:

Since no evidence of MERS’ ownership of the underlying note has been
offered, and other courts have concluded that MERS does not own the
underlying notes, this court is convinced that MERS had no interest it could transfer to Citibank. Since MERS did not own the underlying note, it could not transfer the beneficial interest of the Deed of Trust to another. Any
attempt to transfer the beneficial interest of a trust deed without
ownership of the underlying note is void under California law

In support, the judge cited In Re Vargas (California Bankruptcy Court); Landmark v. Kesler (Kansas Supreme Court); LaSalle Bank v. Lamy (a New York case); and In Re Foreclosure Cases (the "Boyko" decision from Ohio Federal Court). (For more on these earlier cases, see here , here and here.) The court concluded:

Since the claimant, Citibank, has not established that it is the
owner of the promissory note secured by the trust deed, Citibank is
unable to assert a claim for payment in this case.

The broad impact the case could have on California foreclosures is suggested by attorney Jeff Barnes [7], who writes:

This opinion . . . serves as a legal basis to challenge any
foreclosure in California based on a MERS assignment; to seek to void
any MERS assignment of the Deed of Trust or the note to a third party
for purposes of foreclosure; and should be sufficient for a borrower to
not only obtain a TRO [temporary restraining order] against a Trustee’s
Sale, but also a Preliminary Injunction barring any sale pending any
litigation filed by the borrower challenging a foreclosure based on a
MERS assignment.

While not binding on courts in other jurisdictions, the ruling could
serve as persuasive precedent there as well, because the court cited
non-bankruptcy cases related to the lack of authority of MERS, and
because the opinion is consistent with prior rulings in Idaho and Nevada
Bankruptcy courts on the same issue.

What Could This Mean for Homeowners?

Earlier cases focused on the inability of MERS to produce a
promissory note or assignment establishing that it was entitled to
relief, but most courts have considered this a mere procedural defect
and continue to look the other way on MERS’ technical lack of standing
to sue. The more recent cases, however, are looking at something more
serious. If MERS is not the title holder of properties held in its name,
the chain of title has been broken, and no one may have standing to sue. In MERS v. Nebraska Department of Banking and Finance , MERS insisted that it had no actionable interest in title, and the court agreed.

An August 2010 article in Mother Jones

titled "Fannie and Freddie’s Foreclosure Barons" exposes a widespread
practice of "foreclosure mills" in backdating assignments after
foreclosures have been filed. Not only is this perjury, a prosecutable
offense, but if MERS was never the title holder, there is nothing to assign. The defaulting homeowners could wind up with free and clear title.

In Jacksonville, Florida, legal aid attorney April Charney has been
using the missing-note argument ever since she first identified that
weakness in the lenders’ case in 2004. Five years later, she says, some
of the homeowners she’s helped are still in their homes. According to a Huffington Post article titled "‘Produce the Note’ Movement Helps Stall Foreclosures":

Because of the missing ownership documentation, Charney is now
starting to file quiet title actions, hoping to get her homeowner
clients full title to their homes (a quiet title action ‘quiets’ all
other claims). Charney says she’s helped thousands of homeowners delay
or prevent foreclosure, and trained thousands of lawyers across the
country on how to protect homeowners and battle in court.

Criminal Charges?

Other suits go beyond merely challenging title to alleging criminal activity. On July 26, 2010, a class action
was filed in Florida seeking relief against MERS and an associated
legal firm for racketeering and mail fraud. It alleges that the
defendants used "the artifice of MERS to sabotage the judicial process
to the detriment of borrowers;" that "to perpetuate the scheme, MERS was
and is used in a way so that the average consumer, or even legal
professional, can never determine who or what was or is ultimately
receiving the benefits of any mortgage payments;" that the scheme
depended on "the MERS artifice and the ability to generate any necessary
‘assignment’ which flowed from it;" and that "by engaging in a pattern
of racketeering activity, specifically ‘mail or wire fraud,’ the
Defendants . . . participated in a criminal enterprise affecting
interstate commerce."

Local governments deprived of filing fees may also be getting into
the act, at least through representatives suing on their behalf. Qui tam
actions allow for a private party or "whistle blower" to bring suit on
behalf of the government for a past or present fraud on it. In State of California ex rel. Barrett R. Bates , filed May 10, 2010, the plaintiff qui tam
sued on behalf of a long list of local governments in California
against MERS and a number of lenders, including Bank of America,
JPMorgan Chase and Wells Fargo, for "wrongfully bypass[ing] the
counties’ recording requirements; divest[ing] the borrowers of the right
to know who owned the promissory note . . .; and record[ing] false
documents to initiate and pursue non-judicial foreclosures, and to
otherwise decrease or avoid payment of fees to the Counties and the
Cities where the real estate is located." The complaint notes that "MERS
claims to have ‘saved’ at least $2.4 billion dollars in recording
costs," meaning it has helped avoid billions of dollars in fees
otherwise accruing to local governments. The plaintiff sues for treble
damages for all recording fees not paid during the past ten years, and
for civil penalties of between $5,000 and $10,000 for each unpaid or
underpaid recording fee and each false document recorded during that
period, potentially a hefty sum. Similar suits have been filed by the
same plaintiff qui tam in Nevada and Tennessee.

By Their Own Sword: MERS’ Role in the Financial Crisis

MERS is, according to its website, "an innovative process that
simplifies the way mortgage ownership and servicing rights are
originated, sold and tracked. Created by the real estate finance
industry, MERS eliminates the need to prepare and record assignments
when trading residential and commercial mortgage loans." Or as Karl Denninger puts it, "MERS’ own website claims that it exists for the purpose of circumventing assignments and documenting ownership!"

MERS was developed in the early 1990s by a number of financial
entities, including Bank of America, Countrywide, Fannie Mae, and
Freddie Mac, allegedly to allow consumers to pay less for mortgage
loans. That did not actually happen, but what MERS did allow was the
securitization and shuffling around of mortgages behind a veil of
anonymity. The result was not only to cheat local governments out of
their recording fees but to defeat the purpose of the recording laws,
which was to guarantee purchasers clean title. Worse, MERS facilitated
an explosion of predatory lending in which lenders could not be held to
account because they could not be identified, either by the preyed-upon
borrowers or by the investors seduced into buying bundles of worthless
mortgages. As alleged in a Nevada class action called Lopez vs. Executive Trustee Services, et al.:

Before MERS, it would not have been possible for mortgages with no
market value . . . to be sold at a profit or collateralized and sold as
mortgage-backed securities. Before MERS, it would not have been possible
for the Defendant banks and AIG to conceal from government regulators
the extent of risk of financial losses those entities faced from the
predatory origination of residential loans and the fraudulent re-sale
and securitization of those otherwise non-marketable loans. Before MERS,
the actual beneficiary of every Deed of Trust on every parcel in the
United States and the State of Nevada could be readily ascertained by
merely reviewing the public records at the local recorder’s office where
documents reflecting any ownership interest in real property are

After MERS, . . . the servicing rights were transferred after the
origination of the loan to an entity so large that communication with
the servicer became difficult if not impossible …. The servicer was
interested in only one thing – making a profit from the foreclosure of
the borrower’s residence – so that the entire predatory cycle of
fraudulent origination, resale, and securitization of yet another
predatory loan could occur again. This is the legacy of MERS, and the
entire scheme was predicated upon the fraudulent designation of MERS as
the ‘beneficiary’ under millions of deeds of trust in Nevada and other

Axing the Bankers’ Money Tree

If courts overwhelmed with foreclosures decide to take up the cause,
the result could be millions of struggling homeowners with the banks off
their backs, and millions of homes no longer on the books of some
too-big-to-fail banks. Without those assets, the banks could again be
looking at bankruptcy. As was pointed out in a San Francisco Chronicle article by attorney Sean Olender following the October 2007 Boyko [pdf ] decision:

The ticking time bomb in the U.S. banking system is not resetting
subprime mortgage rates. The real problem is the contractual ability of
investors in mortgage bonds to require banks to buy back the loans at
face value if there was fraud in the origination process.

. . . The loans at issue dwarf the capital available at the largest
U.S. banks combined, and investor lawsuits would raise stunning
liability sufficient to cause even the largest U.S. banks to fail . . . .

Nationalization of these giant banks might be the next logical
step-a step that some commentators said should have been taken in the
first place. When the banking system of Sweden collapsed following a housing bubble in the 1990s, nationalization of the banks worked out very well for that country.

The Swedish banks were largely privatized again when they got back on
their feet, but it might be a good idea to keep some banks as publicly-owned entities , on the model of the Commonwealth Bank of Australia .
For most of the 20th century it served as a "people’s bank," making low
interest loans to consumers and businesses through branches all over
the country.

With the strengthened position of Wall Street following the 2008
bailout and the tepid 2010 banking reform bill, the U.S. is far from
nationalizing its mega-banks now. But a committed homeowner movement to
tear off the predatory mask called MERS could yet turn the tide. While
courts are not likely to let 62 million homeowners off scot free, the
defect in title created by MERS could give them significant new leverage
at the bargaining table.

Ellen Brown wrote this article for YES! Magazine ,
a national, nonprofit media organization that fuses powerful ideas with
practical actions. Ellen developed her research skills as an attorney
practicing civil litigation in Los Angeles. In Web of Debt ,
her latest of eleven books, she shows how the Federal Reserve and "the
money trust" have usurped the power to create money from the people
themselves, and how we the people can get it back. Her websites are webofdebt.com , ellenbrown.com , and public-banking.com .

Common Dreams

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