Trend: A Kansas Court ruling means foreclose on homes with securitized mortgages in Kansas just got a lot harder, and the ruling could spread to the rest of the nation.
MERS (Mortgage Electronic Registration Systems) is a key component of this issue. Below are excerpts from commentaries by Barry Ritholtz (The Big Picture) and Karl Denninger (The Market Ticker).
Here's the big question: How will this impact home builders, home sales, banks, and mortgage bondholders?
In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. (Other than GlobalResearch.ca, I have yet to see any MSM coverage of the issue). The Court stated that MERS’ relationship is not that of a true party possessing all the rights given a buyer. Hence, the court ruled:
“By statute, assignment of the mortgage carries with it the assignment of the debt. . . . Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.”.
What does this mean for the 60 million people — over half of all US mortgages — whose loans have been securitized, sliced and diced, and are now held by MERS?
To start, it potentially gives a powerful weapon to homeowners who are being foreclosed upon. If their mortgage is held by MERS, they certainly have a strong basis for challenging the action on the grounds of standing. (Note that this was a Kansas COURT OF APPEALS decision, and while it is not binding on other states the way a US Supreme court ruling would be, it is likely to be influential). I also think the Kansas Court of Appeals could also review this case.
A mortgage is a combination of a promissory note (that is, a promise to pay) and a security instrument. That is, there's a deed of trust and a debt (the promissory note.)
State law governs foreclosure and most states require as a matter of statute that these two items remain intact. Further, most states require as a matter of statute (that is, law!) that to foreclose you must present proof that you actually have an enforceable interest. In many cases this requires what is known as a "wet signature" - that is, the actual original signed document from the debtor confirming agreement to be bound to the terms. In addition you must establish ownership of that document - that is, you must show an unbroken chain of assignments from the originating bank to your hand.
This is where the problem comes in - the originating lender has no standing to foreclose once he sells off the mortgage. He was paid in full and thus has no standing to appear in court.
MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.
They may as well have said "we have decided that we can abrogate state law with impunity." Oh wait - they did, didn't they?
Sorry folks, life doesn't work that way.
If state law requires an unbroken chain of recorded assignments in order to document ownership of a mortgage and thus standing to foreclose, MERS cannot override this state law by fiat.
Many judges, including some Florida, have held repeatedly that despite the lack of an actual chain of assignments and often despite a lack of actual "wet signatures" on an original promissory note they will evict people from their homes regardless! You have to wonder how many of those judges have been bought, bribed or cajoled by banking interests, given that the purpose of a Judge is to do just that - judge - not write law. If the legislature says you need an unbroken chain of assignments and an original document for it to be enforceable, then it does.
But in other states banks have run into a problem - judges, rather tired of the "fast and loose" way banks have played with the law for the last decade, have put their foot down and actually done their job - that is, they have judged the facts and enforced the law as written.
In those locales MERS has run into trouble.
The underlying issue is that many of these so-called "securities" (MBS, CDOs, etc) were issued "light" of the required legal mandates to keep the chain of assignments and actual consent signatures required for enforcement. Many people charge that the reason behind this was simple volume. I disagree.
I believe that a large part of the root cause of these "lost" documents is to cover up blatant and in many cases outrageous fraud. It is difficult to prove that a bank or other lender knew and ignored stated-income fraud (or allegedly "investigated" and "underwrote" a file when it did not) when the original file has been turned into ticker-tape confetti courtesy of the closest paper shredder!
MERS has thus given cover to a tremendous amount of fraudulent conduct - the very conduct that predatory lending statutes, "wet signature" and "chain of title" laws are supposed to prevent.
The real bottom line here is that securitized bondholders may in fact be holding worthless pieces of paper.