One never knows what is going to come out of Congress, as not even Congress truly knows what is going to come out of Congress. Hence, it was a real surprise when Congress tried to extend the concept of home ownership to the lower levels of the overall income earning segment. Subprime lending, namely the granting of mortgage loans to households wherein their total incomes did not qualify for a "standard" or "prime" single family home loan, was clearly an American made "craze".
In and during the period 2000 through approximately mid 2008, for many of the nation's "subprime" households to receive loans and for many major financial institutions to loan out available funds at high rates, create "new" mortgage products, sell these newly created products downstream to investors (both institutional and individual investors) at a significant profit, investments banks and commercial banks created an unusual national scenario - subprime mortgages that were packaged and sold into mortgage backed securities.
To create loans of significant size worthy of securitization (mortgages packaged together and merged into a negotiable security), a wide variety of lenders, from small local banks to a host of well respected national institutions clearly encouraged borrowers, most often, unsuspecting borrowers to obtain loans for sums larger than they were able to properly service on an ongoing basis. This overborrowing trend became very fashionable via the use of a blend of "salesmanship" and other improper tactics. These maneuvers included inducing overborrowing by informing potential borrowers they would be able to refinance their mortgage loans at lower rates out into the future and to more or less ignore the Adjustable Rate Features ("ARM") as their real estate continued to increase in price they could also be able to sell their newly acquired homes at inflated prices and pocket personal financial rewards.
This plan or flow of funds became the underpinning for a national financial disaster. Commencing soon after the failure of Lehman Brothers in 2008, the mortgage securitization market began to fail, based upon a combination of the failure of the securitization marketplace, the inability to accurately price these securities and the fact that with a national recession a significant number of home owners began to fail in making their ongoing monthly mortgage payments. To add fuel onto the fire, there was also no marketplace into which, tens of thousands (and more) of these newly acquired homes could be sold on a local or nationwide basis. In simple terms, a negative triangular situation or at a minimum a three (3) way failure came into being. Based upon the Securities and Exchange Commission ("SEC") Rules and Regulations that have existed and have been continuously updated and reinforced since the 1930s and the Federal Reserve Systems regulatory policies, such a situation was considered by most regulators, Central (Federal Reserve) Bankers and politicians as one that could never come into being in this nation. As such no authority or regulatory agency prepared a securities or residential mortgage defense or preset solution for such an event or national situation.
Specifically, based upon the large number of mortgage defaults and some unique structural features of mortgage backed securities, there is widespread inability of lenders to present the documentary proof required in most states to obtain a judgment of foreclosure. The lenders' disability in evidencing their claims is a nationwide problem that affects most of 40 million mortgages written from 1999/2000 to 2008, denoting $12 trillion in loans. Most of the mortgages written during this period were transferred by the originating lenders into mortgage pools in order to create mortgage backed securities. Not only did this so-called "Securitization" process generate an historic bubble in real estate values, but most importantly, the securitization process flagrantly ignored longstanding legal principles for the transfer and sale of notes and mortgages.
As of the present, the courts have declined to lower the legal standards required to obtain a judgment of foreclosure, notwithstanding the lenders' disability in meeting these strict requirements and notwithstanding the unprecedented number of borrowers now in default. Currently, residential mortgage defaults and foreclosures are at historic levels. In addition, recent economic reports state that 29.0% of homes in the United States are "underwater" - meaning the amount owed on the homeowner's mortgage is greater than the current market value of the home. As a result of these market conditions, millions of defaulting borrowers are unable to refinance and are being "sued" (and sometimes harassed) for foreclosure of their residences, even though the party suing them does not have the ability to truly foreclose on the home. The public is already aware of the robo-signing frauds committed by the banks, but that was just the tip of the iceberg.
Just one such example of this, is the thousands of cases in which JPMorgan Chase is suing for foreclosure as the purchaser of the assets of Washington Mutual. JPMorgan Chase acquired Washington Mutual's assets from the FDIC in September 2008. However, according to the U.S. Senate Permanent Subcommittee on Investigations, Washington Mutual was a "conveyor belt" designed to "feed the securitization machine on Wall Street." The mortgages issued by Washington Mutual, and listed as "assets," were sold off before the ink was dry. So the fact is that thousands of the mortgages that JPMorgan Chase is now claiming the right to foreclose on were sold by Washington Mutual into mortgage securitization trusts long before JPMorgan Chase acquired the assets of Washington Mutual. That means that JPMorgan Chase never acquired thousands of the notes they now claim to own as a purchaser of Washington Mutual's assets.
Bank of America committed similar actions with the assets it allegedly purchased from Countrywide; and these are only two (2) "small" examples of the fraud by the banks that is being perpetrated across the nation. Those seeking to prevent foreclosures will defend against these potential foreclosures, and quiet the title, i.e., remove open liens from the property's title to obtain marketable title. The effect of this strategy will enable the property to be sold with marketable title into the overall stream of business and commerce.
The keystone of this process is the ability to beat the banks in court. This is possible in thousands of cases as a result of a "Perfect Storm" that has made these foreclosure actions unwinnable for the banks. The securitization process, by design, disregarded legal requirements for the transfer of mortgages. Banks did not properly negotiate notes according to the Uniform Commercial Code. As a result, in thousands of cases, the banks are unable to prove that they hold legal title to the notes being sued over.
In addition, the banks utilization of an entity called MERS to affect millions of mortgage transfers in the securitization of mortgage loans is very useful for homeowners in court. MERS stands for Mortgage Electronic Registration Systems, Inc. MERS is a privately held company owned by a consortium of banks that operates an electronic registry designed to track servicing rights and ownership of mortgage loans in the United States. Real estate transactions in the nation have always been subject to state regulations and county level recordation requirements. MERS was created by the banks to fit into the public system of recording mortgages by creating a private system, so the financial industry could create a fluid trade in mortgage-backed securities while saving billions of dollars in county recording fees.
In creating MERS the banks grossly miscalculated. In 2011, Courts held that the transfer of mortgages via the MERS system was invalid. As a result, even if a bank is able to prove legal title to the note, the courts have refused to grant a judgment of foreclosure if the bank acquired its mortgage through MERS. In reaching this historic decision about MERS, the courts noted - the rules should not be "bent to accommodate a system that has taken on a life of its own." To fully appreciate the immense impact of these legal decisions, the language of the Courts is illustrative:
"MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process. This Court does not accept the argument that because MERS may be involved with 50.0% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law." (In re Agard, 444 B.R. 231, 248 (Bankr.E.D.N.Y.2011).
The hard line taken against the banks In re: Agard (above) was adopted and extended in Bank of New York v. Silverberg, in which the Court stated:
"MERS purportedly holds approximately 60 million mortgage loans. This Court is mindful of the impact that this decision may have on the mortgage industry in New York, and perhaps the nation. Nonetheless, the law must not yield to expediency and the convenience of lending institutions." (Bank of New York v. Silverberg, 86 AD3d 274, Appellate Division of the Supreme Court New York, June 7, 2011.)
There are several reasons why borrowers do not undertake their own defense against foreclosure, though it appears insurmountable for the banks to defend themselves as a result of the securitization process. In general, defaulting borrowers have a defeated state of mind from the moment they receive a foreclosure summons. They have struggled to keep their homes by depleting their savings and by leveraging credit cards. They have seen their hopes raised and then dashed by offers from the banks of loan modifications that never materialize. Moreover, most people take a simplistic view of their default, which goes like, "I accepted the loan and now I can't pay it back, so of course I will lose my house." Moreover, most defaulting borrowers do not understand how the law makes it possible for them to win against the banks. Finally, after suffering job losses and trying to hang on to their homes for as long as they can, borrowers do not have the financial resources necessary to pay an effective attorney to fight for them.
These factors that prevent borrowers from undertaking a meaningful defense are reflected in the statistic that over 80.0% of borrowers in foreclosure never even hire a lawyer to help them fight to keep the home they live in. Rather they just bide their time, waiting for the inevitable sheriff's sale. Even among defaulting borrowers who are represented by counsel, most of the attorneys representing these borrowers simply charge small fees in exchange for delaying the foreclosure for as long as possible or negotiating a short sale in which the borrower loses his home anyway. So, notwithstanding the banks' inability to support their claims for foreclosure, the foreclosures continue to roll along, simply because in most cases the banks are unopposed.
Based upon the above outline a solid number of households whose homes are facing either foreclosure or a very solid legal fight with a large financial institution (or their legal firms), are in a firm position to defend and protect their residences. This protection can be based upon one or a combination of factors - a) prior improper actions by the banks or those who securitized the original mortgages, b) lack of correctly owned documentation at the present time to effect a proper foreclosure, c) lost or missing documentation in the overall chain of title and; d) improper chain of title of either the note or deed of trust (or both).
The ability to undertake and prevent mortgage foreclosures via improper actions of banks and their legal firms can be undertaken by appropriately skilled Attorneys. Usually these firms actively repeat the same defense actions over and over, in the same way the banks and their legal firms use the same preset collection or system of documentation to seek a foreclosure. Most often, small or localized law firms who create a significant set of documents will most probably NOT have the opportunity to utilize these well created documents over and over again to defend hundreds or even thousands of foreclosures.
On the other hand, via utilizing a well created and formatted set of documentation "syndicates" or "groups" of law firms can clearly benefit from "scales of economy" that will come into play and drastically reduce and contain defense costs in relation to foreclosure efforts by lending institutions or their representatives. Here, defendants and their law firms will be able to mutually undertake and service the needs of those being pursued and should be able to obtain significant positive results.
Dr. Lehrer has been an independent Economist and Financial Consultant since 1980. He holds four degrees from New York University: Bachelor of Science (Finance), Master of Business Administration (Banking), Master of Arts (Economics) and a Doctorate in Urban Economics. After a career on the corporate lending staff of Bankers Trust Company (New York), Dr. Lehrer became a Manager for the Greek Shipper, Costas Lemos [dec'd]. Here, he assisted in a variety of projects in New York, Houston, Denver, Guam and in Europe. Dr. Lehrer relocated to Houston, Texas in 1977.
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