“So why did the robosettlement not undo the robosigning foreclosure crunch? Simple –foreclosure stuffing. What happened is that since the properties not entering the foreclosure pipeline are effectively kept out of inventory, even shadow inventory, and thus the distressed end market, the monthly drop in foreclosures has acted as a form of subsidy to the housing market, as month after month less inventory than otherwise should, enters the market. As the chart above shows, there is now a 2.5 million “backlog” of properties that should be foreclosed upon based on historical trendlines, but which are being completely ignored by banks. A stuffed foreclosure channel, if you will. What this has resulted in is a logical increase in prices of the properties that are on the market. The trade off, naturally, is that there are millions of properties, not only in shadow inventory, but in this sub-shadow pre-foreclosure space, where the tenants live mortgage-free as the banks refuse to begin the foreclosure process (which already takes a record length of time – think years – to go from issuance of Default Notice until a new tenants buys and moves into the property). It is these beneficiaries of bank generosity that are to “thank” for the fact that houses are rising in price, or, in other words, less affordable for everyone else.”
THAT’S TRILLIONS with a T
Your mortgage documents are fake!
Prepare to be outraged. Newly obtained filings from this Florida woman’s lawsuit uncover horrifying scheme
by David Dayen / August 12, 2013
If you know about foreclosure fraud, the mass fabrication of mortgage documents in state courts by banks attempting to foreclose on homeowners, you may have one nagging question: Why did banks have to resort to this illegal scheme? Was it just cheaper to mock up the documents than to provide the real ones? Did banks figure they simply had enough power over regulators, politicians and the courts to get away with it? (They were probably right about that one.) A newly unsealed lawsuit, which banks settled in 2012 for $95 million, actually offers a different reason, providing a key answer to one of the persistent riddles of the financial crisis and its aftermath. The lawsuit states that banks resorted to fake documents because they could not legally establish true ownership of the loans when trying to foreclose. This reality, which banks did not contest but instead settled out of court, means that tens of millions of mortgages in America still lack a legitimate chain of ownership, with implications far into the future. And if Congress, supported by the Obama administration, goes back to the same housing finance system, with the same corrupt private entities who broke the nation’s private property system back in business packaging mortgages, then shame on all of us. The 2011 lawsuit was filed in U.S. District Court in both North and South Carolina, by a white-collar fraud specialist named Lynn Szymoniak, on behalf of the federal government, 17 states and three cities. Twenty-eight banks, mortgage servicers and document processing companies are named in the lawsuit, including mega-banks like JPMorgan Chase, Wells Fargo, Citi and Bank of America. Szymoniak, who fell into foreclosure herself in 2009, researched her own mortgage documents and found massive fraud (for example, one document claimed that Deutsche Bank, listed as the owner of her mortgage, acquired ownership in October 2008, four months after they first filed for foreclosure). She eventually examined tens of thousands of documents, enough to piece together the entire scheme.
A mortgage has two parts: the promissory note (the IOU from the borrower to the lender) and the mortgage, which creates the lien on the home in case of default. During the housing bubble, banks bought loans from originators, and then (in a process known as securitization) enacted a series of transactions that would eventually pool thousands of mortgages into bonds, sold all over the world to public pension funds, state and municipal governments and other investors. A trustee would pool the loans and sell the securities to investors, and the investors would get an annual percentage yield on their money. In order for the securitization to work, banks purchasing the mortgages had to physically convey the promissory note and the mortgage into the trust. The note had to be endorsed (the way an individual would endorse a check), and handed over to a document custodian for the trust, with a “mortgage assignment” confirming the transfer of ownership. And this had to be done before a 90-day cutoff date, with no grace period beyond that. Georgetown Law professor Adam Levitin spelled this out in testimony before Congress in 2010: “If mortgages were not properly transferred in the securitization process, then mortgage-backed securities would in fact not be backed by any mortgages whatsoever.” The lawsuit alleges that these notes, as well as the mortgage assignments, were “never delivered to the mortgage-backed securities trusts,” and that the trustees lied to the SEC and investors about this. As a result, the trusts could not establish ownership of the loan when they went to foreclose, forcing the production of a stream of false documents, signed by “robo-signers,” employees using a bevy of corporate titles for companies that never employed them, to sign documents about which they had little or no knowledge. Many documents were forged (the suit provides evidence of the signature of one robo-signer, Linda Green, written eight different ways), some were signed by “officers” of companies that went bankrupt years earlier, and dozens of assignments listed as the owner of the loan “Bogus Assignee for Intervening Assignments,” clearly a template that was never changed. One defendant in the case, Lender Processing Services, created masses of false documents on behalf of the banks, often using fake corporate officer titles and forged signatures. This was all done to establish standing to foreclose in courts, which the banks otherwise could not. Szymoniak stated in her lawsuit that, “Defendants used fraudulent mortgage assignments to conceal that over 1400 MBS trusts, each with mortgages valued at over $1 billion, are missing critical documents,” meaning that at least $1.4 trillion in mortgage-backed securities are, in fact, non-mortgage-backed securities. Because of the strict laws governing of these kinds of securitizations, there’s no way to make the assignments after the fact. Activists have a name for this: “securitization FAIL.”
One smoking gun piece of evidence in the lawsuit concerns a mortgage assignment dated Feb. 9, 2009, after the foreclosure of the mortgage in question was completed. According to the suit, “A typewritten note on the right hand side of the document states: ‘This Assignment of Mortgage was inadvertently not recorded prior to the Final Judgment of Foreclosure… but is now being recorded to clear title.’” This admission confirms that the mortgage assignment was not made before the closing date of the trust, invalidating ownership. The suit further argued that “the act of fabricating the assignments is evidence that the MBS Trust did not own the notes and/or the mortgage liens for some assets claimed to be in the pool.” The federal government, states and cities joined the lawsuit under 25 counts of the federal False Claims Act and state-based versions of the law. All of them bought mortgage-backed securities from banks that never conveyed the mortgages or notes to the trusts. The plaintiffs argued that, considering that trustees and servicers had to spend lots of money forging and fabricating documents to establish ownership, they were materially harmed by the subsequent impaired value of the securities. Also, these investors (which includes the Treasury Department and the Federal Reserve) paid for the transfer of mortgages to the trusts, yet they were never actually transferred. Finally, the lawsuit argues that the federal government was harmed by “payments made on mortgage guarantees to Defendants lacking valid notes and assignments of mortgages who were not entitled to demand or receive said payments.” Despite Szymoniak seeking a trial by jury, the government intervened in the case, and settled part of it at the beginning of 2012, extracting $95 million from the five biggest banks in the suit (Wells Fargo, Bank of America, JPMorgan Chase, Citi and GMAC/Ally Bank). Szymoniak herself was awarded $18 million. But the underlying evidence was never revealed until the case was unsealed last Thursday. Now that it’s unsealed, Szymoniak, as the named plaintiff, can go forward and prove the case. Along with her legal team (which includes the law firm of Grant & Eisenhoffer, which has recovered more money under the False Claims Act than any firm in the country), Szymoniak can pursue discovery and go to trial against the rest of the named defendants, including HSBC, the Bank of New York Mellon, Deutsche Bank and US Bank. The expenses of the case, previously borne by the government, now are borne by Szymoniak and her team, but the percentages of recovery funds are also higher. “I’m really glad I was part of collecting this money for the government, and I’m looking forward to going through discovery and collecting the rest of it,” Szymoniak told Salon.
It’s good that the case remains active, because the $95 million settlement was a pittance compared to the enormity of the crime. By the end of 2009, private mortgage-backed securities trusts held one-third of all residential mortgages in the U.S. That means that tens of millions of home mortgages worth trillions of dollars have no legitimate underlying owner that can establish the right to foreclose. This hasn’t stopped banks from foreclosing anyway with false documents, and they are often successful, a testament to the breakdown of law in the judicial system. But to this day, the resulting chaos in disentangling ownership harms homeowners trying to sell these properties, as well as those trying to purchase them. And it renders some properties impossible to sell. To this day, banks foreclose on borrowers using fraudulent mortgage assignments, a legacy of failing to prosecute this conduct and instead letting banks pay a fine to settle it. This disappoints Szymoniak, who told Salon the owner of these loans is now essentially “whoever lies the most convincingly and whoever gets the benefit of doubt from the judge.” Szymoniak used her share of the settlement to start the Housing Justice Foundation, a non-profit that attempts to raise awareness of the continuing corruption of the nation’s courts and land title system. Most of official Washington, including President Obama, wants to wind down mortgage giants Fannie Mae and Freddie Mac, and return to a system where private lenders create securitization trusts, packaging pools of loans and selling them to investors. Government would provide a limited guarantee to investors against catastrophic losses, but the private banks would make the securities, to generate more capital for home loans and expand homeownership. That’s despite the evidence we now have that, the last time banks tried this, they ignored the law, failed to convey the mortgages and notes to the trusts, and ripped off investors trying to cover their tracks, to say nothing of how they violated the due process rights of homeowners and stole their homes with fake documents. The very same banks that created this criminal enterprise and legal quagmire would be in control again. Why should we view this in any way as a sound public policy, instead of a ticking time bomb that could once again throw the private property system, a bulwark of capitalism and indeed civilization itself, into utter disarray? As Lynn Szymoniak puts it, “The President’s calling for private equity to return. Why would we return to this?”
the FINE PRINT
Look closely at the paperwork if you ever get foreclosed on. It could pay off. That’s what Lynn Szymoniak learned when her bank foreclosed on her Palm Beach Gardens home in 2008. Szymoniak, an attorney and renowned expert in foreclosure law, was suspicious of the way foreclosures were being conducted in Florida, so she started looking at documents. Eventually she made headlines when she found that the paperwork in tens of thousands of other foreclosure cases seemed to be fraudulent. Now, as multiple sources have reported, Szymoniak is getting $18 million as a result of her investigative efforts — part of a $95 million settlement paid out by Bank of America, JPMorgan Chase, Wells Fargo and Citigroup.
Fixing the Mortgage Mess: The Game-changing Implications of Bain v. MERS
by Ellen Brown / 08/23/2012
Two landmark developments on Aug. 16 give momentum to the growing interest of cities and counties in addressing the mortgage crisis using eminent domain:
1. The Washington State Supreme Court held in Bain v. MERS, et al., that an electronic database called Mortgage Electronic Registration Systems (MERS) is not a “beneficiary” entitled to foreclose under a deed of trust; and
2. San Bernardino County, Calif., passed a resolution to consider plans to use eminent domain to address the glut of underwater borrowers by purchasing and refinancing their loans.
MERS is the electronic smokescreen that allowed banks to build their securitization Ponzi scheme without worrying about details like ownership and chain of title. According to property law attorney Neil Garfield, properties were sold to multiple investors or conveyed to empty trusts, subprime securities were endorsed as triple A, and banks earned up to 40 times what they could earn on a paying loan, using credit default swaps in which they bet the loan would go into default. As the dust settles from collapse of the scheme, homeowners are left with underwater mortgages with no legitimate owners to negotiate with. The solution now being considered is for municipalities to simply take ownership of the mortgages through eminent domain. This would allow them to clear title and start fresh, along with some other lucrative dividends. A major snag in these proposals has been that to make them economically feasible, the mortgages would have to be purchased at less than fair market value, in violation of eminent domain laws. But for troubled properties with MERS in the title – -which now seems to be the majority of them — this may no longer be a problem. If MERS is not a beneficiary entitled to foreclose, as held in Bain, it is not entitled to assign that right or to assign title. Title remains with the original note holder; and in the typical case, the note holder can no longer be located or established, since the property has been used as collateral for multiple investors. In these cases, counties or cities may be able to obtain the mortgages free and clear. The county or city would then be in a position to “do the fair thing,” settling with stakeholders in proportion to their legitimate claims, and refinancing or reselling the properties, with proceeds accruing to the city or county.
Bain v. MERS: No Rights Without the Original Notes
Although Bain is binding precedent only in Washington State, it is well reasoned and is expected to be followed elsewhere. The question, said the panel, was “whether MERS and its associated business partners and institutions can both replace the existing recording system established by Washington statutes and still take advantage of legal procedures established in those same statutes.” The Court held that they could not have it both ways:
Simply put, if MERS does not hold the note, it is not a lawful beneficiary… MERS suggests that, if we find a violation of the act, “MERS should be required to assign its interest in any deed of trust to the holder of the promissory note, and have that assignment recorded in the land title records, before any non-judicial foreclosure could take place.” But if MERS is not the beneficiary as contemplated by Washington law, it is unclear what rights, if any, it has to convey. Other courts have rejected similar suggestions. [Citations omitted.]
If MERS has no rights that it can assign, the parties are back to square one: The original holder of the promissory note must be found. The problem is that many of these mortgage companies are no longer in business, and even if they could be located, it is too late in most cases to assign the note to the trusts that are being tossed this hot potato. Mortgage-backed securities are sold to investors in packages representing interests in trusts called REMICs (Real Estate Mortgage Investment Conduits), which are designed as tax shelters. To qualify for that status, however, they must be “static.” Mortgages can’t be transferred in and out once the closing date has occurred. The REMIC Pooling and Servicing Agreement typically states that any transfer after the closing date is invalid. Yet few, if any, properties in foreclosure seem to have been assigned to these REMICs before the closing date, in blatant disregard of legal requirements. The whole business is quite complicated, but the bottom line is that title has been clouded not only by MERS but because the trusts purporting to foreclose do not own the properties by the terms of their own documents. Legally, the latter defect may be even more fatal than filing in the name of MERS in establishing a break in the chain of title to securitized properties.
What This Means for Eminent Domain Plans: Focus on San Bernardino
Under the plans that the San Bernardino County board of supervisors voted to explore, the county would take underwater mortgages by eminent domain and then help the borrowers into mortgages with significantly lower monthly payments. Objections voiced at the Aug. 16 hearing included suspicions concerning the role of Mortgage Resolution Partners, the private venture capital firm bringing the proposal (would it make off with the profits and leave the county footing the bills?), and where the county would get the money for the purchases. A way around these objections might be to eliminate the private middleman and proceed through a county land bank of the sort set up in other states. If the land bank focused on properties with MERS in the chain of title (underwater, foreclosed or abandoned), it might obtain a significant inventory of properties free and clear. The county would simply need to give notice in the local newspaper of intent to exercise its right of eminent domain. The burden of proof would then transfer to the claimant to establish title in a court proceeding. If the court followed Bain, title typically could not be proved and would pass free and clear to the county land bank, which could sell or rent the property and work out a fair settlement with the parties. That would resolve not only the funding question but whether using eminent domain to cure mortgage problems constitutes an unconstitutional taking of private property. In these cases, there would be no one to take from, since no one would be able to prove title. The investors would take their place in line as unsecured creditors with claims in equity for actual damages. In most cases, they would be protected by credit default swaps and could recover from those arrangements. The investors, banks and servicers all profited from the smokescreen of MERS, which shielded them from liability. As noted in Bain:
Critics of the MERS system point out that after bundling many loans together, it is difficult, if not impossible, to identify the current holder of any particular loan, or to negotiate with that holder… Under the MERS system, questions of authority and accountability arise, and determining who has authority to negotiate loan modifications and who is accountable for misrepresentation and fraud becomes extraordinarily difficult.
Like MERS itself, the investors must deal with the consequences of an anonymity so remote that they removed themselves from the chain of title. On Aug. 15, the Federal Housing Finance Agency threatened to take action against municipalities condemning federal property. But to establish its claim, the FHFA, too, would have to establish that the mortgages were federal property; and under the Bain ruling, this could be difficult.
Setting Things Right
While banks and investors were busy counting their profits behind the curtain of MERS, homeowners and counties have been made to bear the losses. The city of San Bernardino is in such dire straits that on Aug. 1, it filed for bankruptcy. San Bernardino and other counties are drowning in debt from a crisis created when Wall Street’s real estate securitization bubble burst. By using eminent domain, they can clean up the destruction of their land title records and 400 years of real property law. And by setting up their own banks, counties and other municipalities can use their own capital and revenues to generate credit for local purposes. Homeowners who paid much more for a home than it was worth as a result of the securitization bubble have little chance of challenging the legitimacy of their underwater mortgages on their own. Insisting that their state and local governments follow the lead of Washington State and San Bernardino County may be their best shot at escaping debt peonage to their mortgage lenders.
the PEOPLE vs.
Stop Payment! A homeowners’ revolt against the banks
by Christopher Ketcham / January 2012
The first slide was cryptic. QUIET TITLE: THE NEW AMERICAN REVOLUTION, it said. The presenter, a former real estate broker named George Mantor, promised the words would make sense by the end of the two-hour workshop. “The revolution takes learning,” said Mantor. He was a wiry man in cowboy boots with a sunburned nose and hands that shook, and he described himself as a member of the National Homeowners Cooperative, a group dedicated to fighting foreclosures and shifting the burden of mortgage debt “back upon the shoulders of those who invented it—Wall Street and the greed we all see manifested there.” Mantor advertised the free event, which took place last March at the public library in Ramona, California, as an opportunity for those in attendance to join the NHC and become the “brave pioneers” who would “take on big banks and win.” About twenty people, old men and their old wives and a few younger people, had shown up. Many had either lost their homes or were about to be foreclosed upon. Mantor’s first recommendation, per slide No. 21, was to STOP KIDDING OURSELVES. “We are no longer a nation of laws,” he said. “America’s greatest asset, its middle class, is being intentionally destroyed. And elections are not the answer. Voting,” he said, “is like playing patty-cake with a man holding a machete.” Household net worth was down $12.3 trillion since 2007; the country ranked forty-eighth in life expectancy worldwide; one half of all American children were expected to live on food stamps sometime in their lives. Our pensions were upside down and sinking, our 401(k)s were now “201(k)s,” our home values could fall 25 percent or more in the coming years. “Now how is it possible,” asked Mantor, “that Wall Street is an island of prosperity in this great sea of poverty? Is this what we want?” “No,” said a voice in the crowd. “So how the hell did we get here?” asked Mantor, before launching into a breathless history of banking deregulation under Ronald Reagan; how it accelerated in the 1990s under Bill Clinton; how the Gramm–Leach–Bliley Act of 1999 dropped the barriers that barred commercial banks from taking on the risks of investment banks; how the Commodity Futures Modernization Act of 2000 allowed for the proliferation of derivatives markets; how derivatives formed an “avatar economy,” a system of illusory value built atop the real economy, in particular the economy of the edifices in wood and brick and stone that people like us bought and sold and called home. Mantor clicked through the slides faster, telling the now familiar story of the housing boom and bust. Wall Street had packaged our home loans in derivatives known as mortgage-backed securities so that the banks could raise more capital for more loans—to anyone and everyone—to be pooled into more securities to make more profits. The housing machine, of course, collapsed under the weight of its many frauds. The result was a recession, bailouts for the banks, and foreclosures on the homes of the kind of people who had come to listen to Mantor. He said there were 50 million handguns in America. He talked about armed struggle, a rising up. He mentioned that a month earlier there had been a report on Fox News that Al Qaeda planned to target executives of the banks in New York City. “The American middle class,” said Mantor, “appears to be getting a new ally.” But, he told the room, there was another strategy that we could follow: attack the banking industry with the fine print of real estate law. For a bank to foreclose on a homeowner, the law requires the bank to show it owns the loan secured by the mortgage against a house. To do that, the lender needs to produce a chain of title as documentary proof that it has legally acquired the loan. This, said Mantor, is where opportunity beckoned. In the frenzied mortgage markets of the past decade, the chains of titles on the loans of tens of millions of homeowners had been “clouded.” If homeowners sued to quiet the title—demanding proof of who really owned their loan—there was a chance they could get their house back. They could even separate their house from the debt against it. The debt then would be unsecured, non-collateralized, and the bank could not take the house even if the homeowners never repaid the money. “And why should we pay it? What are they gonna do?” Mantor struck a defiant pose, his chin out, and rocked for a moment on the heels of his boots. “The fight going forward is about the title,” he went on. “We need to do it together or it won’t work. Pack the courtrooms with quiet-title actions.”
When Mantor finished his presentation, a squat man with a white beard and a big belly stood up and introduced himself as Charles J. Koppa, cofounder of the National Homeowners Cooperative and a related group called Protect America’s Dream. Like Mantor, Koppa had been a player in the housing game; he had invested in properties, watched them rise in value, and flipped them, and for many years had worked as a real estate broker and loan officer in Ramona. But now, he said, he was organizing a citizens’ movement to oppose the banks, and he urged those in attendance to join the NHC and Protect America’s Dream. He said he was organizing a series of public events in Ramona called the Mad As Hell Seminars, in order “to create a mad outcry across America, starting right here in Ramona.” Then he handed out a flyer that said “Main Street demands to KNOW WHO holds their NOTES on their HOMES. ARE YOU MAD AS HELL?” For a fee, Koppa could lead the revolution. At the heart of the clouded-title problem is a Virginia-based company, recently much in the national news, called Mortgage Electronic Registration Systems. MERS was created in 1995 as a privately held venture of the major mortgage-finance operators, chief among them the government-sponsored mortgaging entities Fannie Mae and Freddie Mac.1 Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corporation, contributed half of the funds to create MERS, and representatives from both entities served on MERS’s steering committee. Other major shareholders include Bank of America, Chase Home Mortgage, CitiMortgage, the Mortgage Bankers Association, and the American Land Title Association. Its stated purpose was to manage a confidential electronic registry for the tracking of the sale of mortgage loans between lenders, which could now place loans under MERS’s name to avoid filing the paperwork normally required whenever mortgage assignments changed hands. No longer would the traffickers in mortgages have to document their transactions with county clerks, nor would they have to pay the many and varied courthouse fees for such transactions. Instead, MERS was listed in local recording offices as the “mortgagee of record,” the in-name-only owner, a so-called nominee for the lender, so that MERS would effectively “own” the loan where the public record was concerned, while the lenders traded it back and forth. This centralized database facilitated the buying and selling of mortgage debt at great speed and greatly reduced cost. It was a key innovation in expediting the packaging of mortgage-backed securities. Soon after the registry launched, in 1999, the Wall Street ratings agencies pronounced the system sound. “The legal mechanism set up to put creditors on notice of a mortgage is valid,” as was “the ability to foreclose,” assured Moody’s. That same year, Lehman Brothers issued the first AAA-rated mortgage-backed security built out of MERS mortgages. By the end of 2002, MERS was registering itself as the owner of 21,000 loans every day. Five years later, at the peak of the housing bubble, MERS registered some two thirds of all home loans in the United States. Without the efficiencies of MERS there probably would never have been a mortgage-finance bubble.
After the housing market collapsed, however, MERS found itself under attack in courts across the country. MERS had singlehandedly unraveled centuries of precedent in property titling and mortgage recordation, and judges in state appellate and federal bankruptcy courts in more than a dozen jurisdictions—the primary venues where real estate cases are decided—determined that the company did not have the right to foreclose on the mortgages it held. In 2009, Kansas became one of the first states to have its supreme court rule against MERS. In Landmark National Bank v. Boyd A. Kesler, the court concluded that MERS failed to follow Kansas statute: the company had not publicly recorded the chain of title with the relevant registers of deeds in counties across the state. A mortgage contract, the justices wrote, consists of two documents: the deed of trust, which secures the house as collateral on a loan, and the promissory note, which indebts the borrower to the lender. The two documents were sometimes literally inseparable: under the rules of the paper recording system at county courthouses, they were tied together with a ribbon or seal to be undone only once the note had been paid off. “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,” said the Kansas court, “the mortgage may become unenforceable.” MERS purported to be the independent entity holding the deed of trust. The note of indebtedness, however, was sold within the MERS system, or “assigned” among various lenders. This was in keeping with MERS’s policy: it was not a bank, made no loans, had no money to lend, and did not collect loan payments. It had no interest in the loan, only in the deed of trust. The company—along with the lenders that had used it to assign ownership of notes—had thus entered into a vexing legal bind. “There is no evidence of record that establishes that MERS either held the promissory note or was given the authority [to] assign the note,” the Kansas court found, quoting a decision from a district court in California. Not only did MERS fail to legally assign the notes, the company presented “no evidence as to who owns the note.”
Similar cases were brought before courts in Idaho, Massachusetts, Missouri, Nevada, New York, Oregon, Utah, and other states. “It appears that every MERS mortgage,” a New York State Supreme Court judge recently told me, “is defective, a piece of crap.” The language in the judgments against MERS became increasingly denunciatory. MERS’s arguments for standing in foreclosure were described as “absurd,” forcing courts to move through “a syntactical fog into an impassable swamp.” “What’s happened,” said Christopher Peterson, a law professor at the University of Utah who has written extensively about MERS, “is that, almost overnight, we’ve switched from democracy in real-property recording to oligarchy in real-property recording.” The county clerks who established the ownership of land, who oversaw and kept the records, were democratically elected stewards of those records, said Peterson. Now a corporation headquartered outside Washington, D.C., oversaw the records. “There was no court case behind this, no statute from Congress or the state legislatures,” Peterson told me. “It was accomplished in a private corporate decision. The banks just did it.” Peterson said it was “not a coincidence” that more Americans than at any time since the Great Depression were being forced out of their homes just as records of home ownership and mortgages were transferred wholesale to a privatized database. I first met Charles J. Koppa and the other leaders of the National Homeowners Cooperative at the invitation of Vermont Trotter, a former logging contractor from Coeur d’Alene, Idaho. Trotter’s home was being foreclosed on, and he had started a popular blog about MERS. On the blog, he referred to himself as “V.”—V for vengeance, V for victory, Trotter wasn’t sure what V stood for (aside from his first name)—and the guys behind the NHC had contacted him to ask whether V. could be the spokesman of the movement. “V. is us,” they told him. A few days before the NHC workshop, Trotter and I met at the San Diego airport before driving to Koppa’s house in Ramona, about an hour north. He was trim and tanned and dressed like a ski bum—he’d been out skiing that week—and seemed untroubled by his situation: fifty-three years old, with a nine-year-old daughter to support, no job, his savings running out, and the bank trying to take his house.
After he read about MERS’s legal problems in early 2010, Trotter looked for MERS on his mortgage papers and found it: as nominee for Bank of New York Mellon. He called up the bank and told them to “go to hell.” He was in default already—the logging business had collapsed with the end of the real estate frenzy. In November 2010, refusing to budge from his home, he filed suit against Bank of New York Mellon, demanding that the bank prove ownership of his loan and citing what he called the “MERS curse” as his defense. He lost in the lower courts, and appealed. When I met him in March, the Idaho Supreme Court had set a hearing date for the fall. Trotter was unable to afford a lawyer, so he was going to argue the case himself. He had studied the case law, and believed he knew enough about MERS and the mortgage-contract statutes in Idaho to sway the judges. As we drove toward Ramona, Trotter told me that the “true horror” of MERS was what it could do to homeowners who were current on their mortgage payments—the “good” homeowners who still had a job and who weren’t facing foreclosure. If there was no legal record of which bank owned their debt, and the MERS-mortgaged homeowner nonetheless had been making payments, then who exactly was the homeowner paying? The checks, clearly, were going out each month, cashed by a bank that claimed to own the note. But without the legal record to certify the ownership of the note, it followed that the bank could not legally issue the homeowner a clear title to the home. In effect, a homeowner with MERS on his mortgage could spend thirty years paying a lender that wasn’t the owner of the note. After those thirty years, said Trotter, when the note was paid off, the homeowner would come to an awful discovery: without a clear title issued to stipulate that the home had no claim of debt against it, the homeowner could assert ownership of exactly nothing. “Because you’d always be looking over your shoulder,” said Trotter. “Some other lender could come and say, ‘No, we owned that note. You paid the wrong guy.’ ” When this realization came to him, Trotter was alone in front of his computer—the house was dark; his daughter was asleep—but he said he nearly screamed. “With MERS,” he said, “nobody owns anything. You’re only paying rent.”
As a logging contractor, Trotter had spent a lot of time in title rooms at county courthouses. His work there was a matter of due diligence: he needed proof, for his own indemnity, that the owner of the land he was being asked to log was in fact the real owner and could claim the right to cut timber there. The title searches involved paging through documents that sometimes went back to the 1880s, when the original land grantor was the U.S. government. You couldn’t sell real estate without a clear title, explained Trotter. Title-insurance companies will not insure the sale of a house when the title’s status is unclear, and without title insurance, there can be no home sales. “It means that the mainstay of our economy, real estate, is no longer viable.” He pointed out the window at the houses in the San Diego hills and spoke about the Peruvian economist Hernando de Soto. “De Soto says that free enterprise fails in third-world countries because they have no reliable real-property recording system. No one knows who owns what. What do the Israelis do when they take over parts of Palestine? They destroy property records. And the bureaucrats can tell you, ‘I’m sorry, sir, but there’s no record of that.’” When Trotter and I arrived at Koppa’s house, it was a warm spring afternoon, and Koppa was on his porch with a beer, yelling into the phone. “By God, I’m going to hang up this phone, as I have done before,” he shouted into the receiver, “because this is unfair and this is America and in America you have to document what you do.” Koppa had once owned eleven investment homes in San Diego County, three of which—at a loss of what he said was more than a million dollars—were foreclosed on by lenders using MERS. A couple in Ramona had hired him to fight a foreclosure brought by SunTrust Bank, which had apparently lost their note in the MERS system. The couple, Larry and Karen Graham, had paid a lawyer $2,500 to take on SunTrust, but the lawyer, they said, had “done absolutely nothing” to help. The Grahams then called Koppa, though he had no law license and could not represent them in court. His only power was to pester SunTrust, and to conduct what he called a “title audit” to find any breaks in the chain of title.
Koppa hung up, having gotten nothing he wanted from SunTrust, and turned to me, waving a digital recorder: “The sixteenth hour of tape with these people. They’re going to jail. Fraud and lies, fraud and lies.” Trotter and Koppa, meeting for the first time in person, talked awhile. Then we all sat on the porch, joined by a tall, grim, white-haired man named Steve Campbell, who had been in the mortgage business for thirty-three years—for Citibank, Wells Fargo, and Norwest—and had once owned a house in Las Vegas but lost it in a MERS foreclosure. Koppa and Campbell had met at a foreclosure-defense seminar in Phoenix, in the winter of 2010, and they had talked about “taking on MERS.” Koppa had an idea for a homeowners’ cooperative, “like the cooperatives of the Great Depression, when people will reach out to a neighbor when they no longer trust the government, the businessmen, the bankers.” The two men combined forces. Self-trained in website design, Campbell built a site that they called the National Homeowners Cooperative/Protect America’s Dream. They read George Mantor’s column in National Real Estate Investor and got him to join. Then Trotter signed up. They reached out to lawyers, realtors, journalists, anyone who would listen. They envisioned hundreds of thousands—and eventually tens of millions—of MERS homeowners banding together to mount lawsuits against the banks. They talked about “saving the country one real estate parcel at a time.” They would provide a service to each of those homeowners, but they wouldn’t do it for free. They were broke. “An army travels on its stomach. You got to feed the people in the movement,” Trotter told me. “You got to eat if you want to destroy the banks.” To monetize the NHC the group offered, at a cost of $1,139, a “primary title analysis” that they claimed members of the cooperative could use in court to pursue foreclosure defense, or, as Trotter hoped, to pursue a case of quiet title whether they were being foreclosed on or not. Koppa would be the lead investigator in the title audits, and he would train other investigators. The NHC would feed homeowners, title analysis in hand, to lawyers, and the lawyers would be thankful for the clients. The organization would have state directors, and each state director would have subdirectors looking for homeowners in distress, and when they brought in people who purchased the title analysis, the money would be spread among all parties who had had a hand in drawing new “clients” into the movement. It was to be a proper, vertically integrated enterprise. Later that evening, after Koppa and Trotter went to sleep, Campbell and I sat down to look at the websites he had spent a year building. First, though, he wanted me to see the house in Las Vegas he had once owned. He clicked through photographs. The place had nine rooms, three fireplaces, granite countertops, refinished oak cabinets, a massage chair and a treadmill and king-size sleigh beds and big TVs and an air-hockey table. “I did the lighting,” he said, “and the electrical, the concrete work, the landscaping, brand-new French doors, a tiled courtyard, dug the holes in the yard, planted the trees, laid out sixteen tons of gravel, wheelbarrowed it all in myself, put in $12,000 custom-made awnings and Sunburst blinds, an outdoor firepit so you could sit out in the wintertime, redid the hot tub. Invested over $150,000. I put labor into that house. You’ve never owned a home”—I told him I rented in New York City—“so you can’t understand how personal this all has been.” When the housing market crashed, Campbell lost his job, and then, in September 2010, the house. His wife divorced him, and he ended up living with Koppa and his wife at their house in Ramona. He lingered a moment over the photos, then clicked over to the websites. The National Homeowners Cooperative was the initial portal, and here people could find out—“with no charge,” he said—whether they had MERS on their loans. “Almost every homeowner is attracted, because they’re gonna be curious: Do I have MERS?” MERS homeowners could find other MERS homeowners and form “neighborhood alliances.” Then the user was prompted to Protect America’s Dream and thence to a site, also run by Koppa and Campbell, called HERSID, which stands for Homeowner Examinations of Recordations, Securitizations and Intermediary Documentations. The homeowner, in order to proceed, was then asked for money.
I asked Campbell if he didn’t see a problem in taking cash from homeowners who were already financially distressed. He spun around to face me. “Do you blame us for wanting to make a product and charge a little something from the homeowner and maybe even help them? We have to survive! And maybe we can do it without hurting anyone.” By this point he was yelling so loudly I was worried he would wake the others. After a pause, he continued in a quieter voice. “Because capitalism, you know, is about hurting people,” he said. “It wasn’t capitalism that built this country, it was entrepreneurialism—you made a product and people needed it and it helped them, it made their lives better. The true definition of capitalism is those who seek success by the demise of others. True capitalism is the destruction of your competitor. We’re entrepreneurs.” He clicked on a link on the NHC website that led to a clip from his favorite film, Network. “You know Network? Prophetic.” On the screen was the figure of the crazed evangelizing newscaster Howard Beale, in his famous freak-out scene—Beale in a soaking-wet raincoat over his pajamas. “We’ll start the Mad As Hell Seminars with this,” said Campbell. “I want you to get mad,” said Beale on the screen. “I’m a human being, goddammit! My life has value! So, I want you to get up now”—Campbell nodded his head, and his leg began to tremble—“I want all of you to get up out of your chairs. I want you to get up right now and go to the window, open it, and stick your head out and yell—” Campbell paused the video: “This is what I’ll do to my audiences. We’ll have Mad As Hell meet-ups. And on the website we’ll have Mad As Hell calendars.” There were plans for Mad As Hell T-shirts and Mad As Hell buttons and Mad As Hell baseball caps—an entire Mad As Hell storefront—along with Mad As Hell Tuesdays on the website, when V. would post a new piece of writing and the pages would turn red from 6:00 a.m. until midnight. On May 12 of last year, Sheila Bair, the head of the Federal Deposit Insurance Corporation, testified in a prepared statement before the Senate banking committee about “promoting the stability of our financial system.” One of the “systemic risks” to stability that Bair singled out was the problem of clouded title, though she didn’t identify it as such. She spoke of “flawed mortgage-banking processes” that had “potentially infected millions of foreclosures,” of “a historic breakdown in U.S. mortgage markets,” and she noted that “we do not yet really know the full extent of the problem.”
The extent of the problem is, however, increasingly clear. April Charney, a foreclosure-defense attorney in Florida who is an expert on MERS, wrote me recently to warn that the mortgage market was now suffering from “an incurable case of economic HIV.” The clouded-title infection, she said, “is not limited to mortgages where MERS is nominee for the originating lender.” Whereas MERS had created breaks in the chains of title for tens of millions of loans, she said, the same breaks were increasingly evident for any mortgage that was securitized—which represents the great majority of home loans in the United States today. One example is the case of Antonio Ibanez. In 2007, Ibanez defaulted on the mortgage for his Springfield, Massachusetts, home and was foreclosed on by U.S. Bank. The bank then applied before the Massachusetts Land Court for a “quiet title” action to show that the bank alone owned the property. The Land Court declined to quiet the title. Ibanez’s promissory note was not assigned through the MERS system, nor was MERS named as mortgagee of record; yet the deed and the note for his mortgage nonetheless had been separated before his note was assigned to a securitized trust. A lender called Rose Mortgage had originated the loan, then sold it to Option One Bank, which sold it to Lehman Brothers, which sold it to Lehman’s fully owned subsidiary Structured Asset Securities Corporation, which pooled the loan into Structured Asset Securities Corporation Mortgage Pass-Through Certificates, Series 2006-Z, whose investors were now alleged to be the owner of Ibanez’s note. U.S. Bank was appointed trustee of the securitized trust, to enforce the payment of the notes, and, if necessary, to foreclose on defaulting homeowners such as Antonio Ibanez. The deed had been legally transferred once, while the note had been moved multiple times, without legal assignment under Massachusetts statute, from bank to bank and then to the Lehman trust. As a consequence, U.S. Bank, acting as an agent of the investors in the Lehman trust, did not have the right to foreclose on Ibanez. The Land Court returned ownership of the house to Ibanez, and in January 2011 the Massachusetts Supreme Judicial Court upheld the decision. Bank stocks plummeted on news of the high court’s ruling. Reuters called it a “housing-market catastrophe risk” and reported that the case had unleashed a “bank-eating cancer.” It was unclear whether Ibanez still owed money to any lender, as the factual “beneficiary” of his note could not be determined. He had, in effect, gotten a house for free. The Ibanez decision was retroactive, and it could be applied to most of the securitized loans in Massachusetts. Charney has closely examined the decision in Antonio Ibanez’s case. As the case progressed through the Massachusetts courts, the banks had three years to produce the note showing ownership of the loan, but they were not able to do so. Charney has defended hundreds of foreclosure cases in Florida state courts but said she has yet to see one securitized mortgage in which the loan documents were legally transferred to the trust. She said the evidence also points to investment banks having pledged loans into multiple trusts in order to double-sell the loans to investors—which, if true, would constitute securities fraud. She suggested that investors in mortgage-backed securities had bought “nothing-backed securities,” “empty-sack trusts,” tranches of ethereality, worthless in the real world.
The consequences of all this could be cataclysmic. Pension funds, mutual funds, sovereign-wealth funds, insurance companies, municipalities and state governments, along with government-sponsored entities such as Fannie and Freddie, purchased an estimated $7 trillion worth of mortgage-backed securities during the past decade. If they in fact bought empty sacks, their likely recourse would be to sue the banks that sold them the fraudulent securities, a process that has already begun. In April 2011, the Federal Home Loan Bank of Boston filed a securities-fraud suit against Bank of America, CitiGroup, Goldman Sachs, J.P. Morgan, Capital One, Barclays Capital, Credit Suisse, Deutsche Bank, and numerous other lenders and servicers involved in the $5.8-billion MBS pool in which it had invested. The bank wanted its money back, and charged, among dozens of counts of fraud, that “mortgage loans were not validly assigned, and papers necessary to ensure enforceability of the mortgage were never transferred to the trustee,” and that, as a result, what it had purchased in the trust was “worthless.” Five other Federal Home Loan branches have filed similar suits. Last June, Eric Schneiderman, the attorney general of New York State, opened a probe into fraudulent home-loan securitization practices at Bank of America, Deutsche Bank, and Bank of New York Mellon, and in October Beau Biden, the attorney general of Delaware, announced a suit against MERS for “a range of deceptive trade practices that sow confusion among consumers, investors, and other stakeholders in the mortgage finance system, damage the integrity of Delaware’s land records, and lead to unlawful foreclosure practices.” Adam Levitin, a professor of law at Georgetown University, told me that if the lawsuits are successful, the banks will be on the hook “for hundreds of billions of dollars” and will likely go bankrupt.
A few weeks after the NHC workshop, Vermont Trotter emailed me a twenty-three-page file of court documents relating to a case brought by a Utah man named Scott Harvey. In 2010 Harvey had filed a quiet-title action against the alleged owners of his loan, and he had apparently gotten the debt against his house canceled. Harvey was not facing foreclosure, had never missed a payment on his loan, and was never at risk of losing his house. He had done what Vermont Trotter counseled all Americans to do. “Read the case,” said Trotter. “It’s simple, it’s beautiful, it works.” Harvey had hired a Salt Lake City attorney named Walter Keane, a Chicago transplant who runs a one-man office, to argue his case. In his brief, Keane borrowed language from Kansas’s Landmark decision: it states that MERS had effected “a split of the note and deed of trust,” making “the latter [a] nullity,” and that therefore the debt should be “stricken from the chain of title.” Keane also cited a statement by the Salt Lake County recorder of deeds, who said that MERS was potentially “the scam from hell.” MERS never responded. Nor did the alleged lender. Nor did the trustee for the lender. The judge, finding no disputed facts, handed Harvey the house. The owner of the debt, the true beneficiary, was unknown, and whether Harvey would have to pay back the loan was not for the court to decide. When I met Harvey and Keane at a seafood restaurant in Salt Lake City, they were having drinks with another Salt Lake City homeowner, Mike Waters, who was fighting foreclosure by Bank of America. Waters, a real estate investor with five children, said Bank of America had offered him a loan modification after he lost his job in early 2010, then canceled the contract because the bank admitted it didn’t own the loan and had no right to negotiate the modification. Eighteen months later, in March 2011, after Waters filed a lawsuit alleging breach of contract, the bank suddenly reversed itself and claimed that it did in fact own the loan. Waters had closed hundreds of real estate deals but had never experienced anything like this. Then he read about MERS, which was listed on his deed of trust, and made it the focus of his ongoing lawsuit. Bank of America offered him a cash settlement to drop the suit and sign a nondisclosure agreement, but Waters refused.
Scott Harvey had also been in real estate for many years. When he discovered that his loan had been sold by the originating lender, Garbett Mortgage, to another bank—and when no record of this transfer could be found in the Salt Lake County Recorder’s office—he had an “epiphany” not unlike Vermont Trotter’s. “I asked myself, ‘Who owns the note? Am I just paying rent?’?” Like Waters, he found MERS named on his deed of trust, and thereafter, like Waters, and like Trotter, he learned all he could about MERS. With the help of Keane, Harvey had escaped a $130,000 debt, had resold his house for $155,000—the court had given him clear title to do so—and walked away. He bought another house, where, in October of 2010, he moved with his wife and daughter. “People, you know, are looking at me like I’m gaming the system,” Harvey said. “Like I got away with something. But the system is what’s gaming us.” Keane was in a celebratory mood. He ordered lobster-stuffed shrimp and a filet mignon and more wine. “We are gaming the system as much as the motherfucking banks are,” he said, and laughed so explosively that the diners at the next table turned to stare. When he first arrived in Salt Lake City six years earlier, he had struggled to survive in his practice. “Then I read the Landmark case. And I said, ‘Fuck, I can do this.’ I’m making four times the amount I made in my best year. I fuck the banks! I love it! I’ve got roughly, what, twenty to thirty new clients a month seeking quiet-title actions naming MERS.” In the previous ninety days, he had grossed more than $150,000. “I only take MERS cases. I don’t think there’s a basis in law for me to go after the banks if it’s not a MERS mortgage.” Keane raised a glass of red wine. “So thank you, motherfucking banks. You now have Walt Keane as a crotch-cricket on your ballsack, and I have sunk my fangs. I am the Darwinistic response. The banks have scattered all these corpses across the land—real estate properties where chain of title is broken, where there’s no fucking record—and natural selection has selected Walter the fucking lunatic to clean them up and adapt to this new environment.” “That’s right,” said Harvey, whose voice was an order of magnitude quieter than Keane’s. “It’s time to adapt. What we’re doing, what Walt is doing, is only forcing the banks to obey the law. Why should they be able to disregard centuries of land-titling statutes? Awareness is the first step of adaptation. How is this country going to evolve if people don’t even know what’s going on?” I asked Harvey how much he’d paid Keane in attorney’s fees to get his house free and clear. “Thirteen thousand dollars,” Keane answered for him. “I wrapped that cash around my cock and danced around the room. It was the easiest fucking money I’ve ever made. I got into this MERS game because I’m a capitalist and I wanted to make money. There’s nothing altruistic here.” When he finished his steak, though, he did pay for everyone’s dinner.
At the end of September, I went to see Vermont Trotter argue his case before the Idaho Supreme Court. The hearing was held in an empty auditorium at the University of Idaho, in the city of Moscow, and Trotter, who hadn’t slept the night before, sat alone in an ill-fitting suit at a table that held a pitcher of water and a glass that he didn’t touch. Three lawyers, representing MERS and Bank of New York Mellon, sat on the opposite side of the room, talking breezily. Over the previous weeks, MERS had been faring unexpectedly well in the courts. On August 31, the U.S. District Court for the Northern District of Georgia had dismissed a class-action lawsuit against MERS. On September 7, the U.S. Court of Appeals had tossed out a class-action suit brought against the company by Arizona homeowners. Two days later, the Alabama Supreme Court affirmed that MERS could foreclose on homeowners in that state. And by September 13, two California appellate courts had upheld the legality of MERS foreclosures. Trotter had read about all these decisions, and tried to ignore them. The judges filed in, and Trotter stood. The matter, he said, came down to sloppy recordkeeping. “The most glaring deficiency in this entire action,” he said, was that MERS had not executed an assignment of the deed of trust. “Where is that document? It’s not part of the record before this court. The County Recorder of Deeds couldn’t find it either. I asked! . . . It must be in a secret drawer. Doesn’t that defeat the purpose of publicly recording documents? “Does it matter,” he went on, “whether documents filed in the public record have any authenticity? Or is an impressive but defective scorecard of cases from all over the United States, is that enough to deprive Idaho homeowners of their property and of their rights?”
Trotter sat down, and Bob Pratte, the attorney for MERS, rose and stated that Trotter had “fundamentally misapprehended” Idaho mortgage and contract law. But the heart of his argument was simpler: “The consequences of finding that MERS cannot be a beneficiary would be hugely problematic,” he said. “It is important to understand that if MERS can’t be a beneficiary under a deed of trust, it doesn’t just affect the five or ten percent of the population that doesn’t pay their loans, it affects every transaction. It affects everything they”—MERS—“have done. If they can’t be beneficiary for one purpose, they can’t be a beneficiary for any purpose.” Trotter’s challenge to MERS, said Pratte, would “upset” the “fundamental integrity of negotiable instruments and security instruments” in Idaho, and, if that challenge were upheld, “there would be broad consequences.” Pratte was appealing, in the end, to the power of the status quo, and the fearsomeness of the abyss beyond it. In 1942 the economist Joseph Schumpeter, in his book Capitalism, Socialism, and Democracy, asked, “Can capitalism survive?” Schumpeter thought the prospects weren’t good, in part because corporate capitalism had resulted in a diminished sense of real-property ownership. The “capitalist process,” wrote Schumpeter, substitutes “a mere parcel of shares for the walls of and the machines in a factory.” It thus produces an “evaporation of what we may term the material substance of property—its visible and touchable reality. . . . Dematerialized, defunctionalized and absentee ownership does not impress and call forth moral allegiance as the vital form of property did.” Real property could be seen, held, cared for, protected, preserved; real property gave to the holder of the title his “will to fight, economically, physically, politically.” After Trotter’s trial, I drove eighty miles north to Coeur d’Alene, where he lives near the lake around which the town is built. I wanted to meet him at his house, but he said we should meet at my hotel instead. We drove around. “I really want to see your house,” I said. “I’m thinking about it,” he said. Finally, after much persuading, we pulled up in front of a split-level cedar-sided home, about 1,800 square feet, that had a basketball hoop and a white garage and a bedroom over the garage and big trees towering over a field of tall grass that abutted the driveway. I thought we’d go inside, and reached for my door handle, but Trotter said, “Don’t get out. There are things in there sacred to me, things I cannot show you.” I asked him about the trees. “Oh, let’s see, that’s a forty-year-old ponderosa there, maybe sixty-five feet, and those there are red fir—big-ass trees, serious money, one hundred foot easy—and those there are maples, and I got some locusts. It’s the land. Where you awaken to the land is where you belong. It talks to me. I’ve got a flock of thirty wild turkey that come wandering through, and one night, a cold night, I saw three deer, three buck, outside my bathroom window. I could see their racks. They’ll bed down right in that field. And the birds, the birds, the birds—the crows, the blue herons, seagulls, eagles—and the black squirrels, acrobatic like nobody’s business: wheeee! from tree to tree. And in the spring, the flowers bursting with color.” He paused a moment, looked out the window at his house. “The land, they stole the land.” Trotter’s case is still pending. He might get lucky, like homeowners in Massachusetts and Kansas, and get his home back, or it might be seized like so many others and moved from one side of a bank’s spreadsheet to another. The question before the Idaho court, and everywhere else, is when is the possibility of a cataclysm not a threat to be feared, but an opportunity to be embraced.