The head of one of Wall Street's most important regulatory agencies argued recently that Big Bank CEOs never intended to break the law or engage in foreclosure fraud. Instead, Thomas Curry of the Office of Comptroller of the Currency tells us they weren't cautious enough.
Internal documents obtained from a bank-backed venture several years ago seem to directly contradict this claim. These documents, which include training materials, PowerPoint presentations, and videos, suggest that the industry made a conscious attempt to bypass local jurisdictions and automate processes -- in what can best be described as a fraud-friendly way.
As Comptroller of the Currency, Curry runs one of the agencies charged with keeping our banking system safe, ethical, and crime-free. It's not an enviable task, but it's critical to the safety of our economy. So it should have received more attention when Curry wrote in an industry publication that Wall Street suffered, not from a shortage of ethics, but from an inadequate "risk culture."
Curry's perspective differs markedly from those of leading figures like William Dudley, president of the Federal Reserve Bank of New York, who said last year that "There is evidence of deep-seated cultural and ethical failures at many large financial institutions."
"The problems that have come to light in the years since the financial crisis may not have been the result of conscious decisions on the part of senior management. I doubt, for example, that any large bank chief executive officer called together his senior executives and said, 'Foreclosure paperwork is too time-consuming. Let's start robo-signing the documents.'"
Unfortunately, that statement appears to be incorrect. Documents obtained from an industry-wide venture reveal that the nation's leading mortgage lenders colluded to create a false-front company, driven by a back-end database, specifically for the purpose of bypassing local jurisdictions' taxes and filing requirements. These banks were later to hire low-paid temp workers specifically to process foreclosures (JPMorgan Chase called them the "Burger King kids").
The banking industry's epidemic of mortgage-related fraud might not have been possible without the existence of the legal entity known as "MERS." MERS made it possible to bypass local processes for recording changes in title and loan ownership by pretending that these mortgages were held by this artificial legal creation.
By creating the legal fiction that their loans had been owned by "MERS Inc." all along, banks were able buy and sell them without notifying local jurisdictions -- or, for that matter, the borrowers themselves. Eventually even that wasn't efficient enough, so MERS' backers created something called "MOM" -- MERS as Original Mortgagee -- ensuring that the bank which originated the loan would never be a matter of public record.
MERS also automated the process of transferring ownership by creating a back-end database. These transactions occurred invisibly to the outside world. This, in turn, made it possible to bundle mortgages in a variety of "innovative financial instruments," many of which were falsely certified as "AAA" grade by ratings firms before being fraudulently misrepresented and sold to unwary investors.
To Thomas Curry's point: Did senior executives know this was happening? This list of MERS owners is taken from one of the company's PowerPoint presentations:
MERS PowerPoint slide
As you can see, the list includes AIG, along with a Who's Who of major American banks like Bank of America, Citi, HSBC, Washington Mutual, and Wells Fargo -- banks which have paid billions in fraud penalties since the start of the financial crisis. The owners also included Fannie Mae and Freddie Mac, whose record of mismanagement only began after those government-sponsored enterprises were privatized.
It seems unlikely that these corporations held an ownership stake in MERS without their CEOs' knowledge.
The next slide gives us MERS's corporate structure:
MERS PowerPoint slide
Why was MERS created? As the slide says, the sole purpose of MERS is to serve as the mortgagee for loans registered on the MERS system.
Here's how the legal fiction worked:
MERS "Questions and Answers" Document
Banks in the MERS system either owned or employed loan servicers. Those servicers pretended that their employees were "officers" in the fictional MERS company. (During the financial crisis the nation's largest loan servicers were Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup.) That way, each bank was able to enter into foreclosure and other legal processes without disclosing its own identity or the fact that the ownership and administration of a loan had changed hands. Bank or servicing company employees had two jobs: their real ones, and their make-believe one as "officers" of MERS.
As a result, MERS Inc. became a company with 50 real-life employees -- and more than 20,000 "officers" -- a ratio of 400 officers for each employee.
Here's how they used this legal fiction in practice:
By pretending to hold the loan, MERS is able to file papers on behalf of whoever is holding the title today -- or may hold it tomorrow. Changes in ownership are invisible to the courts and recorders of deeds. It's a false which bypasses centuries of legal protections and property holders' rights.
If it weren't merely a fiction, MERS would be the actual holder of the note. But the next slide clears up any doubts on that score:
What advantages did MERS offer lenders? From the MERS pitch:
Those "hard dollar" savings include the avoidance of local fees and taxes, due at the time of a loan's sale or resale. The MERS sales pitch advertises the convenience of "no recording or re-recording of assignments" (transfer of ownership) and "reduced final doc problems." It also promised "ease of delivery into the secondary markets" -- the bundling and resale of mortgages which turned into massive banking fraud, at JPMorgan Chase and virtually every other major bank in the run-up to the financial crisis.
This virtual company has the right to act against homeowners, with none of the responsibility. If borrowers want to challenge the legality of a foreclosure action, they are entirely dependent on MERS itself to provide that information.
Exchanges drawn from the online "MERS Forum" in 2010 showed that homeowners and bank employees alike were troubled by this. Consumer advocate Nye Lavalle began raising questions about the legality of MERS on this forum more than a decade ago. Even bank employees were concerned. Someone who worked for a bank or its designee wrote the following (copied here verbatim, including errors):
(SUBJECT) Lost Note Affidavits & Beneficial Interests
I was recently told that the manner in which our firm was filing foreclosure actions in FLA was problematic in that MERS was claiming to hold the note and be the only beneficial party with an interest in restablishing the note, when we all know that servicers, investors and the GSEs hold the interests and the payments eventually go to them.
Also, my research of MERS info and procedures shows that MERS never holds any docs including the note and does not have any beneficial interest in the note. Can we be in violation of any applicable laws or putting ourselves indivudally or as a company for claims by borrowers claiming that MERS is not the owner or holder in due course for the loan? I'm troubled by this. Can you help?
The response from MERS Corporate Counsel, in its entirely, was as follows: "Please contact us directly to discuss your concerns. Thank you."
This exchange took place in 2003, five years before the financial crisis and subsequent fraud disclosures.
Comptroller Curry expressed doubt that bank executives might ever say, "Foreclosure paperwork is too time-consuming. Let's start robo-signing the documents." But MERS training documents also promised eased of administration as its software and procedures helped employees "navigate through foreclosures."
For a glimpse into the psychology behind the MERS initiative, here's an image from its training materials:
This part of the training process included a sample exercise: the foreclosure of one "Harry Homeowner" on "Poverty Lane" in Jacksonville, Florida. (Jacksonville became the site of many bank foreclosures.)
Needless to say, there is no "Poverty Lane" in Jacksonville. But this slide offers a glimpse into the mindset of an industry that was determined to make money from homeowner transactions as quickly and aggressively as possible, even if it meant skirting local laws -- and without much compassion for the homeowners involved.
MERS is still in existence, and it has been the subject of multiple lawsuits. It has won a few legal battles and has settled others where it seemed it might lose. It has also lost some key challenges, most notably in a recent Pennsylvania court decision. (Yves Smith has the details.)
Rather than ascribing good intentions to Wall Street CEOs, the Comptroller of the Currency's time might be better spent digging into the machinery which supported such widespread foreclosure fraud. That machinery is still in place. It would be in the OCC's -- and the country's -- best interests to ensure that it causes no further harm to homeowners, investors, or the nation's economy.
(Some documents were originally published in 2010 for "Pictures of MERS.")