Put graphically…
To be clear, all of these banks have in excess of 100% of their
tangible common equity exposed to counterparty risk. BAC has 1200% (most
likely severely understated, but that’s a story for another time) and
JPM, GS and Citi have over 2000% exposure. If something kick’s off in
one of these banks, the others are falling along with them - 100%
correlation as the club collapses, just as I stated to Herb Greenberg and the CNBC audience last Monday.
Do you think anybody was listening? So, next in the brainstorming pool
is the determination of what just could kick this off. Well JP Morgan’s
MBS analysts have given thoughts that are corollary to mine, JP
Morgan’s Analysts Agree with BoomBustBlog Research on the State of JPM
(a Year Too Late) but Contradict CEO Jamie Dimon’s Conference Call
Statements – although they apparently forgot to forward the memo to their CEO in time for the Q3 conference call!
Here are some thoughts from the hyper-intellectual BoomBustBlog
constituency and readership (yeah, my readers are often brighter than I
am):
Reggie,
First of all, thanks for all the great research you and your team are
doing. I am interested in your opinion on an issue relating to
mortgage servicing. One thing that may fall out of this foreclosuregate
mess and loan repurchases will be (1) replacing servicer in RMBS deals
and (2) not reimbursing a servicer for costs incurred due to improper
servicing.
According to Bloomberg, 56% of the market is controlled by four banks:
- Bank of America = $17.5bn (as of Sept. 30)
- JPMorgan = $13.6 billion
- Wells Fargo = $14.5 billion
- Citigroup = $6.2 billion
- total = $51.8bn
What is amazing to me is that the
bank are taking gains by marking the value of these rights up not down.
In the most recent earnings announcement for BofA they say ”The net
loss of $344 million in Home Loans and Insurance decreased $1.3
billion from the year-ago period. Revenue increased 10 percent largely
due to higher mortgage banking income primarily driven by improved
mortgage servicing rights results, net of hedges, and higher production
income driven by wider production margins. These improvements were
partially offset by a $417 million increase in representations and
warranties expense.”
These meaningful assets to these banks. I am curious to know what you think about this.
Reggie,
Thanks for your work.
Aren’t you actually UNDER-selling the crisis here?
Let’s look at the story again: aren’t
PIMCO, Blackrock and the FRBNY asserting SERVICER liability here? In
essence, CountryWide is behaving like a servicer who refuses to collect
mortgage checks – except in this case they’re refusing to service the
loans by “refusing” to foreclose on these properties with valid
documents.
As an illustrative counter-factual,
let’s consider how a bank would behave if it had a lot of loans to be
serviced that COULDN’T be serviced – I mean, there’s no real borrower,
there’s no house, the loan has been sold more than once, the loan
documents are all signed by “Mickey Mouse”, etc.. (You know, standard
operating procedure in 2005).
First things first, if I’m a servicer
of unserviceable loans, I am going to find a way to “refi” as many of
those loans as practicable (and thus generate all-new paperwork)
without actually reworking the terms very much. After all, doing
“re-fis” in order to kick the default can down the road is old hat for
me.
Sounds like the counter-factual matches reality so far.
So if I’m that servicer, what do I do
if I actually have to foreclose? I can’t possibly risk sending this
garbage into a court the way I would a normal foreclosure, so I wait. A
year goes by, two years, maybe even three or four years without a
payment. I present the court with scores of default notices and no
response (because Mickey Mouse can’t write). AND, I don’t present the
judge with just a few loans. No, I BURY the judge in foreclosures. The
judge is now doing so many foreclosures on loans two and three years
without a single payment that shealmost gets to the point of
“robo-signing” foreclosure judgments herself. Occasionally I make a
mistake and somebody challenges on one of these zombie loans. The judge
actually takes time to examine the paperwork and goes nuts, but this
is just a small (but growing) percentage of my foreclosures. Dead
people and illegal immigrants who “buy” their houses from the subprime
Mafia don’t ask many questions.
Again, this counter-factual looks strangely familiar.
But what do I do on the investor
side? That’s much trickier. If I’m dealing with Fannie and Freddie,
there’s probably not much I can do to the loan pools as they generally
demand a pretty straightforward pass-through, (even with the Alt-A
garbage WaMu and CountryWide dumped on them. Fortunately, those loans
are probably a little better, and also fortunately the GSEs are not
eager to cause a lot of foreclosures, so I can delay quite a bit. But
basically if the GSEs bitch, I quietly take some putbacks. Again, this
is what we’re seeing.
Then we come to the private RMBS. At
this level, if I’m a servicer of unserviceable loans, I start to engage
in hijinks. The simplest, easiest thing to do is, again, to just let
the loans go into default for a REALLY long time. By this time, the
lower-tranche buyers of the pools I’m servicing are all speculators and
they have no time or money to examine things like why the foreclosures
are recovering only a tiny fraction of par. Here is a place where we
can test the counter-factual against reality, because this would show
up in breakdowns of the recovery data. Also, “first loss” tranches
would, I guess, start to be wound up – or is that true?
The real problem comes when I start
getting into the tranches where big investors with deep pockets (like
PIMCO) will start asking loan-level questions. I can’t just stick these
guys with horrendous losses on foreclosures all at once or they are
going to go mental. Again, the first, best thing to do is delay, delay,
delay. Again, the counter-factual and the facts match.
Still, I have a problem. If my
behavior doesn’t fit their models and assure them that the revenue will
keep coming to those pools, these guys are going to tell me to start
foreclosing and foreclosing fast. They want to get their money OUT. If
I’m an originator-servicer, or a packager-servicer then maybe I can
mollify them for a time by massaging the pools. As in: “We end up
restoring them, and they go back in the pools.”?????
Is this the counter-factual and the facts matching once again?
Finally, if I’m a desperate
originator-servicer or packager-servicer and I didn’t put the loans out
to a truly “arm’s length” entity and the securitizing agreements are
“flexible” enough, I am going to start to head off recourse by either
buying back some mimimum of vulnerable tranches myself (Santander?)
*or* by siphoning off cash to the pools somehow.
Are we seeing a lot of complex,
total-return swap agreements these days? Have desperate
originator-servicers and packager-servicers engaged in a bit of
semi-off-balance-sheet synthetic DE-securitization? Are banks being
generous with cash collateral on deals that transferred risk (but not
formal ownership) from their QSPEs back onto their own balance sheets?
Now if I saw that kind of stuff, I
would definitely start to believe that banks are dealing with a problem
of unserviceable loans.
You get what I mean.
Reggie,
You see that the various large shoes we were discussing have
begun dropping. Multi-billion dollar demands by non-agency bondholders
for putbacks, and now the government is being forced to take action.
I read elsewhere that a group of hedge funds is organizing for a
similar demand. I view with interest the tiny levels at which the
banks are reserving against these events in comparison with the present
(and probable future) size of the put-back demands. Again, this is
only ONE tentacle of the monster.
So far, the putback demands appear to be merely rep and warranty
driven, i.e, the failing loans do not meet the underwriting
requirements as represented in the prospectus. This does not implicate
the REMICs’ tax-exempt status. However, as claims for wrongful
foreclosure based on the failure of loans to be properly deposited into
trust are proved true — or as the same facts are brought to light by
50 state attorneys general — it will be implicated. This may produce a
larger wave of claims by bondholders, both because of the loss of tax
structure as represented and warranted, and because the knowing failure
to properly deposit the loans (which will be inferred from the
systematic extent of the failure) may support securities fraud claims.
I will be very interested to see how you quantify the size of the problem for the banks.
The Wall Street Journal real estate blog reports that Federal banking regulators will conduct an examination of MERS, the electronic mortgage and servicing rights data service (hat tip ForeclosureHamlet). As much as scrutiny of MERS is very much in order, it remains an open question as to whether this effort is serious.
One impetus for this review is an article by Chris Peterson, which was very critical of MERS’ inconsistent roles. For instance, the manner in which MERS registers mortgages in local courthouses is problematic:
MERS’s rights vis-à-vis mortgages registered on the MERSCORP database have created a conundrum for courts, borrowers, and foreclosure attorneys. In boilerplate security agreements included in mortgages and deeds of trust around the country, lenders include this clause:
“MERS” is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument….
On the one hand, MERS purports to be acting as a nominee—a form of an agent. On the other hand, it also is claiming to be an actual mortgagee, which is to say an owner of the real property right to foreclose upon the security interest. It is axiomatic that a company cannot be both an agent and a principal with respect to the same right.19 In litigation all across the country, attorneys representing MERS frequently take inconsistent positions on the legal status of the company, depending on the legal issue at hand.
Both the MERS-as-an-agent and the MERS-as-an-actual mortgagee theories have significant legal problems. If MERS is merely an agent of the actual lender, it is extremely unclear that it has the authority to list itself as a mortgagee or deed of trust beneficiary under state land title recording acts. These statutes do not have provisions authorizing financial institutions to use the name of a shell company, nominee, or some other form of an agent instead of the actual owner of the interest in the land. After all the point of these statutes is to provide a transparent, reliable, record of actual—as opposed to nominal—land ownership.
Conversely, if MERS is actually a mortgagee, then while it may have authority to record mortgages in its own name, both MERS and financial institutions investing in MERS-recorded mortgages run afoul of longstanding precedent on the inseparability of promissory notes and mortgages. Since the 19th century a long and still vital line of cases has held that mortgages and deeds of trust may not be separated from the promissory notes that create the underlying obligation triggering foreclosure rights.2
As troubling is MERS’ lax corporate governance. The parent, MERSCORP, has under 50 employees; the subsidiary MERS, which is the database, has no employees. It instead relies on the peculiar procedure of having employees of MERS members (typically, bank servicing units and foreclosure mills) temporarily become MERS officers for the sole purpose of taking action in MERS’ name:
As a practical matter, the incoherence of MERS’ legal position is exacerbated by a corporate structure that is so unorthodox as to arguably be considered fraudulent. Because MERSCORP is a company of relatively modest size, it does not have the personnel to deal with legal problems created by its purported ownership of millions of home mortgages. To accommodate the massive amount of paperwork and litigation involved with its business model, MERSCORP simply farms out the MERS, Inc. identity to employees of mortgage servicers, originators, debt collectors, and foreclosure law firms.22 Instead, MERS invites financial companies to enter names of their own employees into a MERS webpage which then automatically regurgitates boilerplate “corporate resolutions” that purport to name the employees of other companies as “certifying officers” of MERS.23 These certifying officers also take job titles from MERS stylizing themselves as either assistant secretaries or vice presidents of the MERS, rather than the company that actually employs them. These employees of the servicers, debt collectors, and law firms sign documents pretending to be vice presidents or assistant secretaries of MERS, Inc. even though neither MERSCORP, Inc. nor MERS, Inc. pays any compensation or provides benefits to them. Astonishingly, MERS “vice presidents” are simply paralegals, customer service representatives, and foreclosure attorneys employed by other companies. MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each.24 Ironically, MERS, Inc.—a company that pretends to own 60% of the nation’s residential mortgages—does not have any of its own employees but still purports to have “thousands” of assistant secretaries and vice presidents.
To be more precise, in Senate testimony earlier this week, MERS president R.K. Arnold said MERS has over 20,000 certifying officers.
To give you an idea of how little control MERS has over the activities of its supposed officers, consider this discussion from a November 11, 2009 deposition of MERSCORP’s William Hultman by Nick Wooten (see page 148):
Q. Is there anyone at MERS who verifies that the acts being undertaken in the name of MERS by its certifying officers are acts which are authorized by this corporate resolution?
A. There’s no one at MERS other than the officers who generally oversee the activities of the certifying officers. However, there are employees of the parent corporation MERSCORP that regularly audit the activities of our members to ensure that they are complying with our rules and procedures in our agreement with them.
Q. Who are those employees?
A. They are the people who work in the law department and the people who work in the products performance division — department.
Q. How many of those people are they?
A. I think there is, there are seven in the law department, and product performance department’s probably, and that — I don’t know off the top of my head because I haven’t looked at the org chart lately, but there’s probably seven or eight or nine people there.
Q. Well, let’s just go with the highest number. Seven in law and nine in product performance. So 16 people out of 47?
A. Give or take, yeah.
Q. And you say those 16 people are involved in auditing the thousands of transactions executed daily by the thousands of certifying officers of MERS?
A. I didn’t say that….
Q. Okay. How much time in a typical day do those 16 people spend auditing the activities of certifying officers?
A. I have no idea.
Q. You are in charge of the law department, aren’t you?
A. No.
Q. You are in charge of what department?
A. I’m in charge of the corporate group or the corporate division.
Q. Does that include the law department?
A. It does.
Q. Who’s in charge of the law department?
A. Sharon Horstkamp.
Q. Does Sharon Horstkamp report to you?
A. She does.
Q. Okay. Do you receive reports on the frequency of audits undertaken by her department?
A. I do not….
Q. Right. And so again my question is there are 16 people designated to look at that issue, and you have thousands of certifying officers; correct?
A. Are you asking me if I have thousands of certifying officers?
Q. Yes.
A. Yes.
Q. You have 16 people who look at their compliance with this resolution?
A. Generally, yes.
Q. And do you have any idea daily how many transactions are taken in the name of MERS by these thousands of corporate certifying officers?
A. Generally, no.
Q. Okay. Is there any way that MERS is able to track every transaction conducted in the name of MERS by a certifying officer?
A. Only to the extent that it’s reported to us either systematically or it’s reported to a certifying officer within the organi- — the servicing organization.
Q. So I mean I guess again my point is there are thousands of transactions on a daily basis that MERS has no record of; right?
A. I don’t know that there are thousands of transactions being taken daily by the certifying officers.
Q. Well, let’s just talk about this affidavit we were discussing with respect to the Harmon Law Offices. Do you have any records in MERS system of the number of affidavits of nonmilitary status executed on a daily basis?
A. In which systems are we speaking?
Q. In MERS system.
A. In the MERS, the computer automated systems?
Q. In any method of storage, retrieval, archiving that is available to you and that you use, do you have any record of the number of affidavits of nonmilitary status executed by a certifying officer on a daily basis in this country?
A. Only to the extent that that information has been reported to another certifying officer of the servicer.
Q. Okay. And how would you obtain that information?
A. I would call the servicer up.
Q. Okay. So that is not a MERS record?
A. Well, to the extent that it’s in the custody of the MERS certifying officer we would consider that a MERS record.
Q. Outside of the servicer’s own system — well, first of all, let me ask it this way. Is the servicer required to report these activities to you on a daily, weekly, monthly basis?
A. Which services?
Q. Affidavits of nonmilitary status.
A. They are not required to report that to us.
Q. Do they report that to you?
A. They do not.
Q. Okay. And on your own systems do you have any records of the number of affidavits of nonmilitary status that are executed on a daily basis?
A. If you’re talking about the MERS system, no.
Q. Okay. What about any other system owned or operated by MERS?
A. Generally, no.
Q. Okay. What about assignments of mortgage or deeds
of trust?
A. What about them?
Q. Do you have any idea how many of those are done on a daily basis by MERS certifying officers?
A. I do not.
Q. Do you have access to that through the MERS system or any other system maintained, owned, controlled and operated by MERS?
A. Only to the extent that we ask the servicer they provide that information to us.
Q. So they do not put that information on the MERS system as a matter of course?
A. Put what stuff on?
Q. I’m sorry. Let me try to ask a better question. Assignments of a mortgage or a deed of trust are not generally reported to MERS on a daily basis, are they?
A. Correct.
Q. And MERS has no records of its own about how many mortgage assignments or assignments of deeds of trust are undertaken in its name on a daily basis, does it?
A. Only to the extent that that information is not in the hands of the MERS certifying officer for a particular servicer.
Q. If you wanted to stop this deposition and go call someone at MERS and say how many assignments have been done in our name today of a mortgage or deed of trust, you could not get that information that simply, could you?
A. I could get the information, but it might take some time.
Q. So there’s nothing in your system that catalogs how frequently that occurs?
A. There’s nothing in the MERS system or the automated systems that we operate for our members that has that information readily available.
Q. And you rely on the servicers to keep any records of that if any records are kept?
A. Yes.
Q. How about foreclosure deeds? Do you have any record of how many foreclosure deeds are executed in the name of MERS on a daily basis in this country by certifying officers?
A. No….
Q. — I mean do you have any idea how many endorsements are done in the name of MERS?
A. No, I do not.
Q. Do you have any idea how many proofs of claim are filed in the name of MERS on a daily basis?
A. I do not.
It gets even better. Between this deposition, and an earlier one of MERSCORP president R.K. Arnold by Nick Wooten, one get a more complete picture of how lax MERS’ operational controls are. MERS does keep a record of who its certifying officers are, but it has not record of what actions any particular certifying officer has taken. This would seem to be a fatal shortcoming in conducting any kind of audit. Arnold maintained that MERSCORP did various quality reviews, but was unable to say what they consisted of or even who on his team was responsible for them.
Both depositions make clear that the integrity system rest entirely on timely and accurate entries by MERS members. Since MERSCORP lacks access to any of the underlying records, it is impossible for it to vet accuracy even if it wanted to absent extensive cooperation with the servicer and document custodian.
For those of you who have the patience, below are the depositions.
September 25. 2009 Deposition of R.K. Arnold, MERSCORP
November 11. 2009 Deposition of William Hultman, MERSCORP
bench craft company rip off
bench craft company rip off
bench craft company rip off
bench craft company rip offbench craft company rip off
bench craft company rip off
bench craft company rip off
bench craft company rip off
bench craft company rip offPut graphically…
To be clear, all of these banks have in excess of 100% of their
tangible common equity exposed to counterparty risk. BAC has 1200% (most
likely severely understated, but that’s a story for another time) and
JPM, GS and Citi have over 2000% exposure. If something kick’s off in
one of these banks, the others are falling along with them - 100%
correlation as the club collapses, just as I stated to Herb Greenberg and the CNBC audience last Monday.
Do you think anybody was listening? So, next in the brainstorming pool
is the determination of what just could kick this off. Well JP Morgan’s
MBS analysts have given thoughts that are corollary to mine, JP
Morgan’s Analysts Agree with BoomBustBlog Research on the State of JPM
(a Year Too Late) but Contradict CEO Jamie Dimon’s Conference Call
Statements – although they apparently forgot to forward the memo to their CEO in time for the Q3 conference call!
Here are some thoughts from the hyper-intellectual BoomBustBlog
constituency and readership (yeah, my readers are often brighter than I
am):
Reggie,
First of all, thanks for all the great research you and your team are
doing. I am interested in your opinion on an issue relating to
mortgage servicing. One thing that may fall out of this foreclosuregate
mess and loan repurchases will be (1) replacing servicer in RMBS deals
and (2) not reimbursing a servicer for costs incurred due to improper
servicing.
According to Bloomberg, 56% of the market is controlled by four banks:
- Bank of America = $17.5bn (as of Sept. 30)
- JPMorgan = $13.6 billion
- Wells Fargo = $14.5 billion
- Citigroup = $6.2 billion
- total = $51.8bn
What is amazing to me is that the
bank are taking gains by marking the value of these rights up not down.
In the most recent earnings announcement for BofA they say ”The net
loss of $344 million in Home Loans and Insurance decreased $1.3
billion from the year-ago period. Revenue increased 10 percent largely
due to higher mortgage banking income primarily driven by improved
mortgage servicing rights results, net of hedges, and higher production
income driven by wider production margins. These improvements were
partially offset by a $417 million increase in representations and
warranties expense.”
These meaningful assets to these banks. I am curious to know what you think about this.
Reggie,
Thanks for your work.
Aren’t you actually UNDER-selling the crisis here?
Let’s look at the story again: aren’t
PIMCO, Blackrock and the FRBNY asserting SERVICER liability here? In
essence, CountryWide is behaving like a servicer who refuses to collect
mortgage checks – except in this case they’re refusing to service the
loans by “refusing” to foreclose on these properties with valid
documents.
As an illustrative counter-factual,
let’s consider how a bank would behave if it had a lot of loans to be
serviced that COULDN’T be serviced – I mean, there’s no real borrower,
there’s no house, the loan has been sold more than once, the loan
documents are all signed by “Mickey Mouse”, etc.. (You know, standard
operating procedure in 2005).
First things first, if I’m a servicer
of unserviceable loans, I am going to find a way to “refi” as many of
those loans as practicable (and thus generate all-new paperwork)
without actually reworking the terms very much. After all, doing
“re-fis” in order to kick the default can down the road is old hat for
me.
Sounds like the counter-factual matches reality so far.
So if I’m that servicer, what do I do
if I actually have to foreclose? I can’t possibly risk sending this
garbage into a court the way I would a normal foreclosure, so I wait. A
year goes by, two years, maybe even three or four years without a
payment. I present the court with scores of default notices and no
response (because Mickey Mouse can’t write). AND, I don’t present the
judge with just a few loans. No, I BURY the judge in foreclosures. The
judge is now doing so many foreclosures on loans two and three years
without a single payment that shealmost gets to the point of
“robo-signing” foreclosure judgments herself. Occasionally I make a
mistake and somebody challenges on one of these zombie loans. The judge
actually takes time to examine the paperwork and goes nuts, but this
is just a small (but growing) percentage of my foreclosures. Dead
people and illegal immigrants who “buy” their houses from the subprime
Mafia don’t ask many questions.
Again, this counter-factual looks strangely familiar.
But what do I do on the investor
side? That’s much trickier. If I’m dealing with Fannie and Freddie,
there’s probably not much I can do to the loan pools as they generally
demand a pretty straightforward pass-through, (even with the Alt-A
garbage WaMu and CountryWide dumped on them. Fortunately, those loans
are probably a little better, and also fortunately the GSEs are not
eager to cause a lot of foreclosures, so I can delay quite a bit. But
basically if the GSEs bitch, I quietly take some putbacks. Again, this
is what we’re seeing.
Then we come to the private RMBS. At
this level, if I’m a servicer of unserviceable loans, I start to engage
in hijinks. The simplest, easiest thing to do is, again, to just let
the loans go into default for a REALLY long time. By this time, the
lower-tranche buyers of the pools I’m servicing are all speculators and
they have no time or money to examine things like why the foreclosures
are recovering only a tiny fraction of par. Here is a place where we
can test the counter-factual against reality, because this would show
up in breakdowns of the recovery data. Also, “first loss” tranches
would, I guess, start to be wound up – or is that true?
The real problem comes when I start
getting into the tranches where big investors with deep pockets (like
PIMCO) will start asking loan-level questions. I can’t just stick these
guys with horrendous losses on foreclosures all at once or they are
going to go mental. Again, the first, best thing to do is delay, delay,
delay. Again, the counter-factual and the facts match.
Still, I have a problem. If my
behavior doesn’t fit their models and assure them that the revenue will
keep coming to those pools, these guys are going to tell me to start
foreclosing and foreclosing fast. They want to get their money OUT. If
I’m an originator-servicer, or a packager-servicer then maybe I can
mollify them for a time by massaging the pools. As in: “We end up
restoring them, and they go back in the pools.”?????
Is this the counter-factual and the facts matching once again?
Finally, if I’m a desperate
originator-servicer or packager-servicer and I didn’t put the loans out
to a truly “arm’s length” entity and the securitizing agreements are
“flexible” enough, I am going to start to head off recourse by either
buying back some mimimum of vulnerable tranches myself (Santander?)
*or* by siphoning off cash to the pools somehow.
Are we seeing a lot of complex,
total-return swap agreements these days? Have desperate
originator-servicers and packager-servicers engaged in a bit of
semi-off-balance-sheet synthetic DE-securitization? Are banks being
generous with cash collateral on deals that transferred risk (but not
formal ownership) from their QSPEs back onto their own balance sheets?
Now if I saw that kind of stuff, I
would definitely start to believe that banks are dealing with a problem
of unserviceable loans.
You get what I mean.
Reggie,
You see that the various large shoes we were discussing have
begun dropping. Multi-billion dollar demands by non-agency bondholders
for putbacks, and now the government is being forced to take action.
I read elsewhere that a group of hedge funds is organizing for a
similar demand. I view with interest the tiny levels at which the
banks are reserving against these events in comparison with the present
(and probable future) size of the put-back demands. Again, this is
only ONE tentacle of the monster.
So far, the putback demands appear to be merely rep and warranty
driven, i.e, the failing loans do not meet the underwriting
requirements as represented in the prospectus. This does not implicate
the REMICs’ tax-exempt status. However, as claims for wrongful
foreclosure based on the failure of loans to be properly deposited into
trust are proved true — or as the same facts are brought to light by
50 state attorneys general — it will be implicated. This may produce a
larger wave of claims by bondholders, both because of the loss of tax
structure as represented and warranted, and because the knowing failure
to properly deposit the loans (which will be inferred from the
systematic extent of the failure) may support securities fraud claims.
I will be very interested to see how you quantify the size of the problem for the banks.
The Wall Street Journal real estate blog reports that Federal banking regulators will conduct an examination of MERS, the electronic mortgage and servicing rights data service (hat tip ForeclosureHamlet). As much as scrutiny of MERS is very much in order, it remains an open question as to whether this effort is serious.
One impetus for this review is an article by Chris Peterson, which was very critical of MERS’ inconsistent roles. For instance, the manner in which MERS registers mortgages in local courthouses is problematic:
MERS’s rights vis-à-vis mortgages registered on the MERSCORP database have created a conundrum for courts, borrowers, and foreclosure attorneys. In boilerplate security agreements included in mortgages and deeds of trust around the country, lenders include this clause:
“MERS” is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument….
On the one hand, MERS purports to be acting as a nominee—a form of an agent. On the other hand, it also is claiming to be an actual mortgagee, which is to say an owner of the real property right to foreclose upon the security interest. It is axiomatic that a company cannot be both an agent and a principal with respect to the same right.19 In litigation all across the country, attorneys representing MERS frequently take inconsistent positions on the legal status of the company, depending on the legal issue at hand.
Both the MERS-as-an-agent and the MERS-as-an-actual mortgagee theories have significant legal problems. If MERS is merely an agent of the actual lender, it is extremely unclear that it has the authority to list itself as a mortgagee or deed of trust beneficiary under state land title recording acts. These statutes do not have provisions authorizing financial institutions to use the name of a shell company, nominee, or some other form of an agent instead of the actual owner of the interest in the land. After all the point of these statutes is to provide a transparent, reliable, record of actual—as opposed to nominal—land ownership.
Conversely, if MERS is actually a mortgagee, then while it may have authority to record mortgages in its own name, both MERS and financial institutions investing in MERS-recorded mortgages run afoul of longstanding precedent on the inseparability of promissory notes and mortgages. Since the 19th century a long and still vital line of cases has held that mortgages and deeds of trust may not be separated from the promissory notes that create the underlying obligation triggering foreclosure rights.2
As troubling is MERS’ lax corporate governance. The parent, MERSCORP, has under 50 employees; the subsidiary MERS, which is the database, has no employees. It instead relies on the peculiar procedure of having employees of MERS members (typically, bank servicing units and foreclosure mills) temporarily become MERS officers for the sole purpose of taking action in MERS’ name:
As a practical matter, the incoherence of MERS’ legal position is exacerbated by a corporate structure that is so unorthodox as to arguably be considered fraudulent. Because MERSCORP is a company of relatively modest size, it does not have the personnel to deal with legal problems created by its purported ownership of millions of home mortgages. To accommodate the massive amount of paperwork and litigation involved with its business model, MERSCORP simply farms out the MERS, Inc. identity to employees of mortgage servicers, originators, debt collectors, and foreclosure law firms.22 Instead, MERS invites financial companies to enter names of their own employees into a MERS webpage which then automatically regurgitates boilerplate “corporate resolutions” that purport to name the employees of other companies as “certifying officers” of MERS.23 These certifying officers also take job titles from MERS stylizing themselves as either assistant secretaries or vice presidents of the MERS, rather than the company that actually employs them. These employees of the servicers, debt collectors, and law firms sign documents pretending to be vice presidents or assistant secretaries of MERS, Inc. even though neither MERSCORP, Inc. nor MERS, Inc. pays any compensation or provides benefits to them. Astonishingly, MERS “vice presidents” are simply paralegals, customer service representatives, and foreclosure attorneys employed by other companies. MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each.24 Ironically, MERS, Inc.—a company that pretends to own 60% of the nation’s residential mortgages—does not have any of its own employees but still purports to have “thousands” of assistant secretaries and vice presidents.
To be more precise, in Senate testimony earlier this week, MERS president R.K. Arnold said MERS has over 20,000 certifying officers.
To give you an idea of how little control MERS has over the activities of its supposed officers, consider this discussion from a November 11, 2009 deposition of MERSCORP’s William Hultman by Nick Wooten (see page 148):
Q. Is there anyone at MERS who verifies that the acts being undertaken in the name of MERS by its certifying officers are acts which are authorized by this corporate resolution?
A. There’s no one at MERS other than the officers who generally oversee the activities of the certifying officers. However, there are employees of the parent corporation MERSCORP that regularly audit the activities of our members to ensure that they are complying with our rules and procedures in our agreement with them.
Q. Who are those employees?
A. They are the people who work in the law department and the people who work in the products performance division — department.
Q. How many of those people are they?
A. I think there is, there are seven in the law department, and product performance department’s probably, and that — I don’t know off the top of my head because I haven’t looked at the org chart lately, but there’s probably seven or eight or nine people there.
Q. Well, let’s just go with the highest number. Seven in law and nine in product performance. So 16 people out of 47?
A. Give or take, yeah.
Q. And you say those 16 people are involved in auditing the thousands of transactions executed daily by the thousands of certifying officers of MERS?
A. I didn’t say that….
Q. Okay. How much time in a typical day do those 16 people spend auditing the activities of certifying officers?
A. I have no idea.
Q. You are in charge of the law department, aren’t you?
A. No.
Q. You are in charge of what department?
A. I’m in charge of the corporate group or the corporate division.
Q. Does that include the law department?
A. It does.
Q. Who’s in charge of the law department?
A. Sharon Horstkamp.
Q. Does Sharon Horstkamp report to you?
A. She does.
Q. Okay. Do you receive reports on the frequency of audits undertaken by her department?
A. I do not….
Q. Right. And so again my question is there are 16 people designated to look at that issue, and you have thousands of certifying officers; correct?
A. Are you asking me if I have thousands of certifying officers?
Q. Yes.
A. Yes.
Q. You have 16 people who look at their compliance with this resolution?
A. Generally, yes.
Q. And do you have any idea daily how many transactions are taken in the name of MERS by these thousands of corporate certifying officers?
A. Generally, no.
Q. Okay. Is there any way that MERS is able to track every transaction conducted in the name of MERS by a certifying officer?
A. Only to the extent that it’s reported to us either systematically or it’s reported to a certifying officer within the organi- — the servicing organization.
Q. So I mean I guess again my point is there are thousands of transactions on a daily basis that MERS has no record of; right?
A. I don’t know that there are thousands of transactions being taken daily by the certifying officers.
Q. Well, let’s just talk about this affidavit we were discussing with respect to the Harmon Law Offices. Do you have any records in MERS system of the number of affidavits of nonmilitary status executed on a daily basis?
A. In which systems are we speaking?
Q. In MERS system.
A. In the MERS, the computer automated systems?
Q. In any method of storage, retrieval, archiving that is available to you and that you use, do you have any record of the number of affidavits of nonmilitary status executed by a certifying officer on a daily basis in this country?
A. Only to the extent that that information has been reported to another certifying officer of the servicer.
Q. Okay. And how would you obtain that information?
A. I would call the servicer up.
Q. Okay. So that is not a MERS record?
A. Well, to the extent that it’s in the custody of the MERS certifying officer we would consider that a MERS record.
Q. Outside of the servicer’s own system — well, first of all, let me ask it this way. Is the servicer required to report these activities to you on a daily, weekly, monthly basis?
A. Which services?
Q. Affidavits of nonmilitary status.
A. They are not required to report that to us.
Q. Do they report that to you?
A. They do not.
Q. Okay. And on your own systems do you have any records of the number of affidavits of nonmilitary status that are executed on a daily basis?
A. If you’re talking about the MERS system, no.
Q. Okay. What about any other system owned or operated by MERS?
A. Generally, no.
Q. Okay. What about assignments of mortgage or deeds
of trust?
A. What about them?
Q. Do you have any idea how many of those are done on a daily basis by MERS certifying officers?
A. I do not.
Q. Do you have access to that through the MERS system or any other system maintained, owned, controlled and operated by MERS?
A. Only to the extent that we ask the servicer they provide that information to us.
Q. So they do not put that information on the MERS system as a matter of course?
A. Put what stuff on?
Q. I’m sorry. Let me try to ask a better question. Assignments of a mortgage or a deed of trust are not generally reported to MERS on a daily basis, are they?
A. Correct.
Q. And MERS has no records of its own about how many mortgage assignments or assignments of deeds of trust are undertaken in its name on a daily basis, does it?
A. Only to the extent that that information is not in the hands of the MERS certifying officer for a particular servicer.
Q. If you wanted to stop this deposition and go call someone at MERS and say how many assignments have been done in our name today of a mortgage or deed of trust, you could not get that information that simply, could you?
A. I could get the information, but it might take some time.
Q. So there’s nothing in your system that catalogs how frequently that occurs?
A. There’s nothing in the MERS system or the automated systems that we operate for our members that has that information readily available.
Q. And you rely on the servicers to keep any records of that if any records are kept?
A. Yes.
Q. How about foreclosure deeds? Do you have any record of how many foreclosure deeds are executed in the name of MERS on a daily basis in this country by certifying officers?
A. No….
Q. — I mean do you have any idea how many endorsements are done in the name of MERS?
A. No, I do not.
Q. Do you have any idea how many proofs of claim are filed in the name of MERS on a daily basis?
A. I do not.
It gets even better. Between this deposition, and an earlier one of MERSCORP president R.K. Arnold by Nick Wooten, one get a more complete picture of how lax MERS’ operational controls are. MERS does keep a record of who its certifying officers are, but it has not record of what actions any particular certifying officer has taken. This would seem to be a fatal shortcoming in conducting any kind of audit. Arnold maintained that MERSCORP did various quality reviews, but was unable to say what they consisted of or even who on his team was responsible for them.
Both depositions make clear that the integrity system rest entirely on timely and accurate entries by MERS members. Since MERSCORP lacks access to any of the underlying records, it is impossible for it to vet accuracy even if it wanted to absent extensive cooperation with the servicer and document custodian.
For those of you who have the patience, below are the depositions.
September 25. 2009 Deposition of R.K. Arnold, MERSCORP
November 11. 2009 Deposition of William Hultman, MERSCORP
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bench craft company rip offThe second part of The Daily Beast's interview with Fox News president Roger Ailes is out today, and Ailes' encore doesn't disappoint. He responded harshly to Jon Stewart's pervasive criticism of cable news and had some tough, ...
FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
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bench craft company rip offThe second part of The Daily Beast's interview with Fox News president Roger Ailes is out today, and Ailes' encore doesn't disappoint. He responded harshly to Jon Stewart's pervasive criticism of cable news and had some tough, ...
FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
News Anywhere, or unified news, or All-Access, whatever we want to call it, demands the singular focus, product development and messaging that Netflix, HBO, Comcast, and Facebook are bringing to it. Those are all skills that have been ...
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FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
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FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
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bench craft company rip offThe second part of The Daily Beast's interview with Fox News president Roger Ailes is out today, and Ailes' encore doesn't disappoint. He responded harshly to Jon Stewart's pervasive criticism of cable news and had some tough, ...
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FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
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bench craft company rip offThe second part of The Daily Beast's interview with Fox News president Roger Ailes is out today, and Ailes' encore doesn't disappoint. He responded harshly to Jon Stewart's pervasive criticism of cable news and had some tough, ...
FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
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bench craft company rip offThe second part of The Daily Beast's interview with Fox News president Roger Ailes is out today, and Ailes' encore doesn't disappoint. He responded harshly to Jon Stewart's pervasive criticism of cable news and had some tough, ...
FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
News Anywhere, or unified news, or All-Access, whatever we want to call it, demands the singular focus, product development and messaging that Netflix, HBO, Comcast, and Facebook are bringing to it. Those are all skills that have been ...
bench craft company rip offThe second part of The Daily Beast's interview with Fox News president Roger Ailes is out today, and Ailes' encore doesn't disappoint. He responded harshly to Jon Stewart's pervasive criticism of cable news and had some tough, ...
FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
News Anywhere, or unified news, or All-Access, whatever we want to call it, demands the singular focus, product development and messaging that Netflix, HBO, Comcast, and Facebook are bringing to it. Those are all skills that have been ...
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News Anywhere, or unified news, or All-Access, whatever we want to call it, demands the singular focus, product development and messaging that Netflix, HBO, Comcast, and Facebook are bringing to it. Those are all skills that have been ...
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FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
News Anywhere, or unified news, or All-Access, whatever we want to call it, demands the singular focus, product development and messaging that Netflix, HBO, Comcast, and Facebook are bringing to it. Those are all skills that have been ...
bench craft company rip offThe second part of The Daily Beast's interview with Fox News president Roger Ailes is out today, and Ailes' encore doesn't disappoint. He responded harshly to Jon Stewart's pervasive criticism of cable news and had some tough, ...
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bench craft company rip offFar from a fad, a new blogging and social media infrastructure has emerged and is still being built and becoming a part of the new hierarchy can be important to.
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FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
News Anywhere, or unified news, or All-Access, whatever we want to call it, demands the singular focus, product development and messaging that Netflix, HBO, Comcast, and Facebook are bringing to it. Those are all skills that have been ...
bench craft company rip offThe second part of The Daily Beast's interview with Fox News president Roger Ailes is out today, and Ailes' encore doesn't disappoint. He responded harshly to Jon Stewart's pervasive criticism of cable news and had some tough, ...
FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
News Anywhere, or unified news, or All-Access, whatever we want to call it, demands the singular focus, product development and messaging that Netflix, HBO, Comcast, and Facebook are bringing to it. Those are all skills that have been ...
bench craft company rip offThe second part of The Daily Beast's interview with Fox News president Roger Ailes is out today, and Ailes' encore doesn't disappoint. He responded harshly to Jon Stewart's pervasive criticism of cable news and had some tough, ...
FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
News Anywhere, or unified news, or All-Access, whatever we want to call it, demands the singular focus, product development and messaging that Netflix, HBO, Comcast, and Facebook are bringing to it. Those are all skills that have been ...
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FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
News Anywhere, or unified news, or All-Access, whatever we want to call it, demands the singular focus, product development and messaging that Netflix, HBO, Comcast, and Facebook are bringing to it. Those are all skills that have been ...
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FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
News Anywhere, or unified news, or All-Access, whatever we want to call it, demands the singular focus, product development and messaging that Netflix, HBO, Comcast, and Facebook are bringing to it. Those are all skills that have been ...
bench craft company rip offThe second part of The Daily Beast's interview with Fox News president Roger Ailes is out today, and Ailes' encore doesn't disappoint. He responded harshly to Jon Stewart's pervasive criticism of cable news and had some tough, ...
FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
News Anywhere, or unified news, or All-Access, whatever we want to call it, demands the singular focus, product development and messaging that Netflix, HBO, Comcast, and Facebook are bringing to it. Those are all skills that have been ...
bench craft company rip offFar from a fad, a new blogging and social media infrastructure has emerged and is still being built and becoming a part of the new hierarchy can be important to.
The second part of The Daily Beast's interview with Fox News president Roger Ailes is out today, and Ailes' encore doesn't disappoint. He responded harshly to Jon Stewart's pervasive criticism of cable news and had some tough, ...
FOX News covers politics on America's Election Headquarters. FOX News political coverage on elections, races, foreign policy, candidates, and national security.
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