The Foreclosure Flood: New (at Least to Me) Takes

More details – deeply disturbing details – dribble out on the foreclosure tsunami. But they’re hard to understand. Arcane acronyms overload the brain.  Details — flotsom and jetsom — keep us from seeing the flood.

The analyses cited below on the Mortgage Electronic Registration System, on pooling and servicing agreements, and on title insurance: it is not clear to me what they portend for the financial and political systems. But, I am certain what they mean in the context of our national crisis of trust.

Here are three writers who clarify aspects of what appears to be the Noah’s Flood of financial catastrophes.

Leslie Lowe
Yesterday, Leslie Lowe, a consultant to responsible investment organizations, posted the following to the Social Investment Forum listserve. I repost it here, with minor edits, with her permission.

Friends and Colleagues,

Please read this very important article about the Mortgage Electronic Registration System (MERS).

Christopher Lewis Peterson ( S.J. Quinney College of Law, Univ. of Utah), “Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title TheoryReal Property, Probate and Trust Law Journal, forthcoming


Hundreds of thousands of home foreclosure lawsuits have focused judicial scrutiny on the Mortgage Electronic Registration System (“MERS”). This Article updates and expands upon an earlier piece by exploring the implications of state Supreme Court decisions holding that MERS is not a mortgagee in security agreements that list it as such. In particular this Article looks at: (1) the consequences on land title records of recording mortgages in the name of a purported mortgagee that is not actually mortgagee as a matter of law; (2) whether a security agreement that fails to name an actual mortgagee can successfully convey a property interest; and (3) whether county governments may be entitled to reimbursement of recording fees avoided through the use of false statements associated with the MERS system. 

I don’t usually recommend law review articles but the financial and mainstream media have missed the real bombshell in the mortgage foreclosure mess.

It isn’t about “sloppy paperwork.”  The robo affidavits are an attempt to hide the fact that (1) mortgage securitization trusts or REMICs  didn’t comply with the IRS rules, and (2) the trusts may not have had a legal interest in the mortgages they were selling.  The consequences in both cases are dire.

REMICS are a vehicle for avoiding double taxation on mortgage backed securities. The tax code governing REMICs requires original (as in blue ink) mortgage documents to be held by the REMIC custodian on the closing date and the REMIC is prohibited from taking distressed paper after the closing date. A failed or disqualified REMIC is liable for 100% tax on income (with interest) from its closing date. There may also be state tax consequences. And, if the REMIC had no legal interest in the mortgages, it was selling pure blue sky!

Yves Smith, Naked Capitalism

Late yesterday evening, I checked Yves Smith’s Naked Capitalism blog (a daily ‘must read’) where she had posted on the pooling and servicing agreements underlying pooled mortgage vehicles. I had enough political polls on my mind to keep me wakeful, so I didn’t let her worry me.

This morning, checking cites, I found two posts by her: here and here on title insurance and on forgeries and false affidavits. (Does she ever sleep?!) The first post she opens, ‘There are so many fronts to the foreclosure crisis that it’s now becoming difficult to stay on top of all of them.’

Prof. Smith should get a red card for flagrant understatement.

Andrew Leonard, Salon

My mind reeling, I turned to Salon hoping for a snarky review of some movie I’ll never see. What I found instead was a piece by Andrew Leonard, ‘A Foreclosure Mess of Their Own Design’.

Via Felix Solomon, Leonard found an earlier law journal article by Utah’s Prof. Peterson. It (and Leonard) quotes a bankruptcy judge’s very lucid illustration of what the stakes are when there’s fraud in a foreclosure. The losers are not necessarily who you think. But, of course, the polity ends up the biggest loser of all.

The quotations from Peterson alone make this article worth reading. Concludes Leonard:

Reading Peterson, it is impossible to avoid the conclusion that the real estate finance industry, acting under its own auspices, is itself responsible for so confusing the question of who owns what that the entire market for residential-mortgage-backed securities is mortally threatened.

The Weather

The fall of 2001 was the most beautiful, I thought then, I’d ever seen. It seemed so wrong – actually impossible — that such perfect days could hold 9/11 and the lunatic reactions of the Bush Administration.

The weather this summer and fall have been much the same: gorgeous, glorious. I’m looking out my window at maple leaves turning yellow and framing them an impossibly blue sky (which no one has yet sold me). So, too, are the anxiety and fear opening each blog brings.

In a few minutes, I will do the only rational thing: go outside and savour the day. Do the same!

H/T:  This article was sparked by Leslie Lowe:  475 Riverside Drive, Suite 900, New York, NY 10115  Tel:  212-812-4358.