In a ruling that could be historic, the Supreme Judicial Court of Massachusetts ruled against two fraudster banks, US Bancorp and Wells Fargo, who illegally foreclosed on homes. In short, the two banks stole homes to which they had no legal claim.
This rattled stock markets, causing the broad-based KBW Bank Index to fall by 2.2%, with Wells Fargo's stock prices falling by 3.4% as markets began to recognize that "business as usual" theft of American homes by banksters will be subject to greater scrutiny. Tellingly, the banks have been arguing that they are following industry practice. The ruling in Massachusetts (one of the most respected Supreme Courts in the US) affirms that industry practice is fraudulent. Perhaps as many as 66 million mortgages (those tainted by improper industry recording procedures) could be affected by the ruling.
As I have been arguing in a series of pieces (see here and here and here), in their haste to commit lender fraud, the banks that securitized mortgages also perpetrated tax fraud and securities fraud. The inevitable outcome of those frauds is foreclosure fraud. As Lynn Szymoniak and Ray Brown have written, 2010 became the year in which "'foreclosure fraud' emerged in case law' -- defined as 'fraud by mortgage companies, mortgage servicing companies, and banks servicing as trustees for securitized trusts." Foreclosure fraud is not a matter of some pesky little paperwork problems. It is the designated solution to paper-over the lending and securities and tax frauds that the banksters used to bubble-up and then collapse the US real estate sector. To put it simply, the Court found that the practices followed by the industry have made legal foreclosure impossible.
All of this, in turn, was happily consistent with the Bush "Ownership Society" plan to transfer all wealth to the top few tenths of one percent of the wealthiest Americans. The banksters would simultaneously burden homeowners with so much debt that they'd lose their homes, and would sell to investors fraudulent toxic waste securities while using credit default swaps to bet on failure. Bush's ownership class would end up as the creditors who got all the homes, who got all the financial wealth sucked out of pension funds and other managed funds, and with their gambling winnings from the inevitable defaults.
But in their haste to steal property, the Wall Street banksters ran up against US property law. They thought the judges would turn a blind eye to blatant theft. Unfortunately, courts across the country have awakened and are beginning to rule against them. As I have said, the banks are toast -- as anyone still holding bank stocks will discover in coming months. Losses will easily wipe out all equity at the biggest banks, several times over. Further, the vulture predators now buying up foreclosed properties will find that the titles are not clear. It will take at least a decade to sort out the mess created by Wall Street's securitization of home mortgages and to restore property rights law.
Here is the good news: Bush's Ownership Society dream has morphed into a Nightmare on Wall Street. The banks have no legal standing to foreclose. Delinquent homeowners that have been subject to foreclosure fraud can remain in their homes. While they still owe their mortgages, no one has the right to take their homes away from them. This improves their negotiating power to secure mortgage modifications -- to get payments down to something they can afford. That is good -- for the homeowners, for their neighbors, for the nation as a whole. And, ironically, even for those holding the "securitized mortgages" -- including the fraudster banks.
The current wave of foreclosures -- expected to reach 13 million by 2012 -- is not good for anyone. It is a classic example of a negative externality, where pursuit of apparent individual self-interest results in losses for everyone. Stopping foreclosures and shutting down the fraudsters will stop those losses. The only ones who will be hurt are the top management officials at the biggest banks -- who will lose their bonuses and who will be prosecuted for numerous felonies. The other 99.9% of the rest of us will experience a Pareto improvement -- as economists call it when you win and no one (but the criminal class) loses.
Let me explain. I will assume that everyone is reasonably familiar with the lending fraud, in which Wall Street rewarded mortgage brokers who induced home-buyers into NINJAs and liar's loans they could not afford -- aided and abetted by crooked real estate agents, appraisers, credit raters, and accountants. Those fraudulent loans were then packaged into fraudulent securities -- that did not meet the "reps and warranties" required by the "PSAs". (Briefly, when an investment bank pooled a bunch of mortgages to "back" a security, it guaranteed that they met minimum standards as required in the Pooling and Service Agreements. But they did not, which means the originators of the securities must take back all the bad "liar's loans".)
I will also assume that readers know that the securities, themselves, were fraudulent from inception because they did not meet those "PSAs" (the very strict requirements governing securitizations -- most important of which was the requirement that the Trustees obtain the "wet ink" notes of the homebuyers, something that apparently was never done). That, in turn, means that "mortgage backed securities" are not backed by mortgages -- they are nothing but unsecured debt and now are mostly worthless.
Finally, I will assume that readers are familiar with the tax and recording frauds perpetrated by the mortgage industry's creation of MERS (Mortgage Electronic Registry System) -- which allowed the banks to illegally evade property recording fees and allowed securities holders to evade US federal taxes. Those expose the banks to hundreds of billions of fees, back taxes, and fines.
One might have thought that all those frauds would be enough to satisfy Wall Street. But, no, the biggest fraud was yet to come -- a fraud that necessarily followed on from all the previous frauds. The structure of the whole Ownership Society juggernaut required low-cost foreclosures in order to transfer property to America's true owner class. It was a foregone -- nay, planned -- conclusion that all the NINJAs and liar's loans would go bad. There would be millions upon millions of homes that would be foreclosed.
Unfortunately, foreclosure is expensive. Over the past half millennium, Western property law evolved to make it difficult for the King or his minions to take property away from its owner. One claiming to be a creditor against land would have to present evidence, including the "wet ink" note, that one had legal standing.
Keeping track of all those notes, collecting payments, properly recording sales, processing foreclosures, and conducting sales of seized property is extremely expensive. That is why Jimmy Stewart's thrifts could not survive with mortgage defaults running higher than a couple of percent. And that was with a very cheap and efficient home finance system based on thrifts that made loans to their community while collecting the community's saving. All you needed was a good loan officer who knew his customers, a teller, and an experienced property appraiser. But the modern mortgage industry needed to support a huge infrastructure of brokers, securities originators and distributors, appraisers, credit raters, accounting firms, mortgage insurers, servicers, and -- importantly -- foreclosers. All of that is costly.
Further, the modern mortgage system was designed to generate a tsunami of defaults, orders of magnitude greater than historic proportions. Indeed, the hope was that virtually all mortgages would go bad, so that the property could be seized and transferred to our true propertied class of rightful owners -- those north of the 99th percentile -- while leaving the dispossessed homeowners in permanent debt peonage as a result of "reformed" bankruptcy law. And bankruptcy of homeowners let the banksters collect on their bets. There is no way that even the exorbitant fees and interest rates charged on hapless subprime and Alt-A borrowers could possibly cover all those costs of the "new and improved" home finance food chain.
Hence, a system of cheaper property transfers and foreclosures would be required. But the banksters were too clever by half in their hurry to create a low-cost foreclosure machine. They knew they could never afford to securitize and then foreclose on millions and millions of mortgages following well-established, legal, and expensive procedures -- with teams of paper pushers, process servers, and lawyers. So they cut corners. And it is the corner-cutting that has come back to bite them.
As I have shown, MERS was created to circumvent the expensive and time-consuming laws that required recording property sales in public offices. Only the initial sale of property would be lawfully recorded; thereafter, the dozen or more sales of a mortgage would be recorded only electronically at MERS, on the fiction that all subsequent sales were in-house transfers among deputized MERS "vice presidents" at member firms. That was recording fraud. MERS also encouraged mortgage servicers to retain the notes, in order to speed the inevitable foreclosures. But that violated Federal tax laws that required the notes to be held by the Trustees of the securitizations. Tax fraud. It also violated the PSAs that required the Trustees to certify that they had the notes. Securities fraud.
Finally, the banksters created something called the Lender Processing Services (LPS) to out-source mortgage default services in order to speed foreclosures--in other words, to circumvent lawful practice. LPS got "kickbacks" from law firms by illegal "fee-splitting", agreeing to share late fees, etc, piled on mortgages in return for sending foreclosure cases to the firms. (Thorne v. Prommis Solutions Holding Corp., Northern District of Mississippi) In addition, LPS has been found to routinely supply incorrect and doctored documents to litigants and judges in foreclosure actions. According to a ruling analyzed by Szymoniak and Brown, it is staffed primarily by paralegals (Burger King kids!), with little supervision by attorneys. Indeed, LPS was designed to minimize human involvement and judgment in the foreclosure process--to save precious time, and more precious money. Judge Sigmund Weiss concluded that LPS's "thoughtless mechanical employment of computer-driven models and communications to inexpensively traverse the path to foreclosure offends the integrity of the American bankruptcy system." But this "thoughtless" and inhuman process was required precisely to minimize the costs to the banks of foreclosing on properties. Hence, just as MERS was created to minimize costs of securitizations and multiple sales of underlying mortgages, LPS was created to minimize court costs of processing the expected foreclosures.
And that brings us to the recent court cases that have thrown a monkey wrench into the bankster's plans. The Massachussetts Ibanez case was found in favor of two homeowners because the mortgage servicers could not prove that the Trusts that supposedly owned the mortgages had any standing. Note, importantly, that there was never any question that the indebted homeowners were delinquent in their payments. The Supreme Court upheld a lower court's decision that foreclosure requires clear ownership of the mortgage -- whether the homeowner has missed payments is immaterial. Further, the Court ruled that the purported creditor must show how it had acquired the mortgage, and must prove that it had standing to claim the property. Neither USBancorp nor Wells Fargo could do so because neither could show a clear chain of title -- transfers of the wet-ink notes from origination through to the bank trying to foreclose.
While many commentators have claimed that it is sufficient to show that a homeowner has missed a mortgage payment in order to seize property that has never been true in the United States. A creditor must show legal standing. And that requires not only that one holds the "mortgage" (the security entitling the creditor to receive mortgage payments) but also the "note" (the borrower's signed IOU). The US Supreme Court has ruled that a "mortgage" without the "note" is a "nullity" -- it does not convey the legal standing required to foreclose. Established court practice in the US is that the "mortgage follows the note". In case after case after case, it has been ruled that if a bank "is not the holder of the Note, then there is no basis for the claim... against the debt arising out of the Note". (Szumowski vs. Bank of America, Northern District of New York, January 6 2011) In short, it does not matter how many payments a debtor has missed; if the bank trying to foreclose cannot produce the note then there is no right to foreclose.
It is probable that many or most foreclosing banks cannot show legal standing. Many have been trying to produce back-dated assignments of the notes (those Burger King robo-signers in action!) sometimes with an assignment date after the homeowner's property was already stolen through an illegal foreclosure. (In re Nuer, a case against J.P. Morgan Chase) From all the machinations and subterfuges the banks have tried in court, it appears that proper transfers of notes almost never took place.
A common practice was to assign a note in "blank" -- the bank that purportedly is receiving the note is not named. The Massachusetts Supreme Court ruled that such an assignment is not enforceable. MERS recommended that servicers retain the notes, and then by deputizing a vice president at the servicer, MERS would claim standing. That, too, has been ruled by courts to be invalid. (Koontz v. EverHome Mortgage, Northern District of Indiana) It breaks the "clear chain of title" that requires the note be indorsed over to the buyer of the mortgage at each sale, and public recording of the transfer. But MERS told the servicing banks to retain the notes, and pretended that an electronic entry on MERS's computer substitutes for a public recording. So even if notes can be produced in foreclosure cases, they do not have the necessary assignments showing each sale and thus proof of the chain of title.
The banks also had been arguing in court that because the PSA's required assignment of notes, there was an "intention" to assign notes even if they were "assigned in blank". Again, the Massachusetts Supreme Court ruled against this practice, arguing that the bank must actually be the named holder in order to gain the right to foreclose. And the assignment must be made by a party that itself had legal title to the mortgage. That in turn requires that the party making the assignment can show the assignment that gave it legal title. This is why the banks have been so easily caught forging post-dated assignments, using clumsy robo-signers with no expertise in forgeries.
Massachusetts Attorney General Martha Coakley concluded that the state's Supreme Court had sent a strong message to banks that "In their careless and hasty stampede to securitize loans, the banks moved at their own peril. Whether by robo-signing or failing to properly transfer title, these financial institutions created this real estate chaos. They should bear the brunt and the cost of the remedy." (See Richard Zombeck)
This ruling is by no means unique. Courts across the country are waking up to the foreclosure scams. Virtually every trick in the foreclosure fraudster's bag has been rejected by some court, somewhere in the country, as judges have come to realize that we have a wave of foreclosure fraud. Indeed, foreclosure fraud is now one of the most important defenses used against foreclosure. Further -- and this is important -- the courts are increasingly ruling that the burden of proof is on the lenders and servicers -- to prove that they were not paid and that they have legal standing to foreclose. The courts have begun to recognize that in many cases, homeowners did not miss payments -- rather, the servicers lost them or intentionally neglected to post them. (In re Wilson, Eastern District of Louisiana)
In many other cases, the homeowners could not identify who held the mortgage (and in some cases, neither could the banks!) -- not surprising given the disarray at MERS, which was not properly staffed (only 50 paid employees!) to handle the volume of mortgages (66 million) it purported to hold. Indeed, banks have been playing "hide the thimble" -- see if you can figure out who owns your mortgage, and while you look they stack up the late fees. The courts have quite reasonably ruled that it is up to the banks and servicers to notify the borrowers when a mortgage is transferred. (In re Nosek, a case involving Ameriquest)
To be sure, property law is largely left up to the states, and it does vary across the country. However, most securitizations are subject to New York law, and to the PSAs that were formulated to conform to that very rigid law. Further, securitizations are also subject to IRS code governing MERICs. So there is more uniformity than one might think, even if some states are more lax. It is also necessary to add the caveat that fraud and criminality must be proven in court -- and that requires an injured party with the means to pursue a case, willing and competent lawyers, and judges who do not rubber-stamp in favor of the banksters. The escalation of legal activity across the country, as well as the recognition by deep pocket investors in securities (such as PIMCO and the NYFed) that they were scammed increases the likelihood that successful defenses against foreclosures and lawsuits against banks will be conducted.
Most readers -- not to mention the judges -- are perplexed: why on earth would our nation's biggest banks have committed multiple frauds, from mortgage origination through to foreclosure?
The short answer is that the "originate to distribute" model was flawed from the beginning. It could never have been profitable. Think about it. The idea was that you would take people who do not qualify for conventional mortgages, sell them houses they cannot afford, give them the worst possible terms you can sucker them into, create an expensive home finance food chain that rewards every link with high fees, pay top management millions in bonuses, and then foreclose and resell the property to reboot the whole process anew. And at the bottom of the whole pyramid is some poor bloke homeowner who loses his job when the Ponzi scheme crashes, as well as a stupendously stupid insurer (AIG) willing to take the other side of all the Wall Street bets that homeowners would default.
The Wall Street blood sucking vampire squids are supposed to, somehow, profit on this business model? Only through fraud, layer upon layer of fraud. The blood suckers thought they'd cook the books, get their bonuses, flaunt the laws, buy the foreclosed properties in fire sales, and emerge as the winners of the new Ownership Society. In the process, they destroyed the economy and the institution of private property in the United States.
Returning to the question -- why would the banks do this? To understand why, you've got to think like a criminal -- that is, like what my colleague Bill Black calls a "control fraud". That leads to a rephrasing of the question: Why would those who control a bank engage in risky and fraudulent activity that is sure to destroy the bank?
The answer, then, is obvious: Because those running the control fraud have no interest in the bank as a going concern -- they are simply looting the institution, running it to maximize their own individual take. They get their bonuses and then jump a sinking ship -- and with luck they move directly into Treasury to arrange bail-outs to let the other rats on their Titanic suck whatever blood remains after the transfusions.