Monday, March 21, 2011

50 state Attorneys General mortgage fraud settlement doesn't address clouded titles

Written by Biloxi

As we all await the 50 state Attorneys General final mortgage fraud settlement with the major large banks, one factor that was not addressed in the state Attorneys General's 27 page settlement is the clouded title of property ownership. Mortgage Electronic Registration Systems, Inc. (MERS) is mentioned in the 27 page settlement, yet the state Attorneys General didn't address the legality of control of property ownership under MERS. As a result of creation of MERS, over 60,000,000 titles to property in every state in the United States are trapped in a collapsed electronic data system, supplied to many major banks in the financial institutions, and shrouded in uncertainty of legal control of property ownership.

Abigail Field of Daily Finance nails it:

You can't sell real estate when you can't establish that you own it -- banks won't loan money for purchasers to buy the property. That's because the bank wants to be sure that if it forecloses, it will get good title to the property. (Yes, this issue practically oozes irony.) That's why banks won't approve a mortgage for a property if a title insurance company won't insure its title. And title insurance companies won't do that if they know the title is clouded.

A few months ago, the Massachusetts Supreme Judicial Court issued its Ibanez decision, which made it clear that the banks' foreclosure practices -- and indeed, the standard securitization deal -- violated longstanding basic Massachusetts real estate law, and thus, many completed Massachusetts foreclosures were invalid. The foreclosing banks, which had either since sold the properties or still "owned" them, had no right to foreclose, and therefore had never owned those properties. So who owns them now? Well, the fact that it's a question is the very definition of "clouded title."

And Yves Smith of Naked Capitalism adds this:

One thing that it is important to stress: that the abuses to established real estate transfer and recording processes were not inherent to the securitization model. I’m not a fan of securitization but the sad reality is that no one is prepared to go back to the more costly in terms of equity required, model of on-balance sheet banking (it would result in a shrinkage of credit that every respectable economist would recommend against and hence will never happen). But no one (except the FDIC, which keeps being ignored) is thinking seriously enough about what it would take to make securitization safer.

Everyone, from the bank originators to the investment bank packagers, got hooked on the easy profits, and kept pushing for ways to streamline the process, to both increase their profits and increase the size of the potential market. The biggest problems result from cutting corners, including the failure of the deal sponsors to adhere to their own agreements with investors, that led to this mess. Securitization had existed since the 1970s; MERS, one of the biggest culprits in the uncertainties over title, did not become a serious player until 1999. The widespread failure to convey notes (the borrower IOU) to securitization trusts appears not to have started until sometime between 2002 and 2004.

This is a collapsed accountability picture: A failed court system to tackle the banks' abuse to the homeowners when no one including the bank is above the law, the lack of leadership from the local level all the way up to the White House, the turning a blinded eye and inability of regulators and policymakers to foresee this trainwreck as it was happening and as it continues to happen, and the total unwillingness of regulators to punish the banks. We always had the consumer protection in the federal agencies. The only problem is the federal agencies are not doing their jobs as required. Which federal agencies are involved with consumer protection? Well, everybody. The Office of Comptroller of Currency (OCC), Office of Thrift Supervision (OTS), National Credit Union Administration (NCUA), Federal Reserve Board,Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency (FHFA), Department of Housing Urban Development (HUD), Veteran Administration (VA), Federal Trade Commission (FTC) and Department of Justice (DOJ) all have consumer protection in their mission. But, in a report called Make Markets Be Markets, special adviser to the new Consumer Financial Protection Bureau Elizabeth Warren pointed out seven agencies with the power to protect consumers have failed to create effective rules for consumer protection. Ms. Warren said:

The seven agencies with a piece of consumer protection have failed to create effective rules for two structural reasons. The first is that financial institutions can currently shop around for the regulator that provides the most lax oversight. By changing from a bank charter to a thrift charter, for example, a financial institution can change from one regulator to another. In fact, an institution may decide to evade a federal regulator altogether by housing its operations in the states and forgoing a federal charter. Bank holding companies can shift their business from their regulated subsidiaries to those with no regulation—and no single regulator can stop them. The problem is exacerbated by the funding structure: regulators’ budgets come in large part from the institutions they regulate. To maintain their size, these regulators compete to attract financial institutions, with each offering more bank-friendly regulations than the next. The result has been a race to the bottom in consumer protection.

The second structural flaw is cultural: consumer protection staff at existing agencies is small, last to be funded, and always second fiddle to the primary mission of the agencies. At the Federal Reserve, senior officers and staff focus on monetary policy, not protecting consumers. At the Office of the Comptroller of the Currency and the Office of Thrift Supervision, agency heads worry about bank profitability and capital adequacy requirements. As the current crisis demonstrates, even when they have the legal tools to protect families, existing agencies have shown little interest in meaningful consumer protection—and there has been no accountability demanding that they do so.

It will be difficult for the 50 state Attorneys Generals to tackle the MERS problem that has affected millions of homeowners as many homeowners will never know who really own their note since banks repackaged and sold off mortgages to other investors. As we can see less consumer protection in the housing mess, we now see the lack of oversight of chain of title in this country. This is why the chain of title, a dismantling of MERS and restoration of the county courthouses and county recorder's officers to record the titles are bad needed for protection.

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