Tuesday, February 15, 2011

Speaking of Avedon Carol, Three

And one more thing I came across via The Sideshow over the past couple of days.

This could - emphasize could - be really significant. Writing at Firedoglake, Cindy Kouril, a former Special Assistant US Attorney in the Southern District of New York, says that
[i]n a tour de force of dicta, a Long Island bankruptcy judge telegraphed the intention to rule against MERS in a whole bunch of pending motions.
MERS stands for Mortgage Electronic Registration Systems, a private company that runs an electronic registry which in theory tracks servicing rights and ownership of mortgage loans in the US. The whole idea of the system is, not surprisingly, to save the banking and real estate industries money (and so increase profits).

To understand how - and I admit that I'm not 100% sure I've got a real grip on this but I do think I've got a basic one so I'm giving a very basic explanation - you need to realize that there are two main documents involved in taking out a loan to buy a house. One is the promissory note; that is the one that lays out the terms of the loan, how much it is, how it's supposed to be repaid, and all the rest of that. The other is the mortgage, which assigns a security interest in your home to the lender - that is, it puts the house up as collateral for the loan.

The idea behind MERS is that it will be the owner (or the owner's nominee) of the security interest indicated by the mortgage - that is, it will hold the mortgage - while the various banks, investors, and loan servicers busily bundle, re-bundle, sell, swap, trade, and otherwise move the promissory notes around to their short-term advantage. The argument is thus that because while all that is going on the security interests in the properties involved are not transferred (because MERS holds them), there is no need to file any assignments with any county land record offices. Because there were, supposedly, no such assignments, get it? So there are also no associated fees to be paid. Presto! Lower costs yielding higher profits. It's an end run around the law that John Yoo could admire.

And at least this one court is not willing to put up with it, finding that
MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process. This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law.
That is, "too big to fail" doesn't cut the mustard in this court. But I suspect that what really has the bankers and their allies worried is the issue of "fractionalization," defined by Kouril as "the process of separating ownership of the Promissory Note from ownership of the Mortgage Deed." The court said:
In simple terms the Movant relies on the argument that a note and mortgage are inseparable. ... While it is generally true that a mortgage travels a parallel path with its corresponding debt obligation, the parties in this case have adopted a process which by its very terms alters this practice where mortgages are held by MERS as “mortgagee of record.” By MERS’s own account, the Note in this case was transferred among its members, while the Mortgage remained in MERS’s name. MERS admits that the very foundation of its business model as described herein requires that the Note and Mortgage travel on divergent paths. Because the Note and Mortgage did not travel together, Movant must prove not only that it is acting on behalf of a valid assignee of the Note, but also that it is acting on behalf of the valid assignee of the Mortgage.
If that's not clear, this is what Kouril says it means and herein is the potential importance of what the court said: The court found that by the very arrangement MERS establishes, the connection between the note and the mortgage is broken and that such fractionalization ends the security interest. Yes, the debt still exists, but the house is no longer collateral for the debt. Put another way, you owe party A money, but they have no present legal claim on your house. Party B has a security interest in your house, but you don't owe them any money! So to proceed with a foreclosure, the foreclosing institution would have to show it holds both the note and the mortgage, which in many MERS-related cases is simply not true or even possible.

I should emphasize that this won't stop foreclosures, especially not in places like Florida with its imfamous "rocket docket." And just because a lender can't foreclose because it has lost - actually, has given away - its security interest in the house, doesn't mean it can't look to other legal means to seize the property to pay the debt. But at least it might - might - provide some daylight between the homes of so many of us struggling day to day to keep going and the grasping hands of Wall Street.

Footnote A: This is not the first court to question MERS' position. In August 2009, for example, in Landmark National Bank v. Kesler, the Kansas Supreme Court found that MERS was a "straw man" that served to cloud the issue of who actually owned either the promissory note or title to the property. What's more, it found that
MERS is not an economic ‘beneficiary’ under the Deed of Trust. It is owed and will collect no money from Debtors under the Note, nor will it realize the value of the Property through foreclosure of the Deed of Trust in the event the Note is not paid.
The decision only applies to Kansas, but perhaps it will guide more courts in the future.

Footnote B: Every time I see the term MERS, I can't help but think of "merser," which is the usual pronunciation of MRSA, which stands for Methicillin resistant Staphylococcus aureus, a so-called "super bug" that is resistant to a wide variety of antibiotics. (I don't usually rely on Wikipedia for medical information, but I compared this with the Mayo Clinic site and the info seemed solid and more conveniently organized.)

Footnote C: If there is someone out there who has a good grip on all this and sees errors in my understanding, please do comment and/or email. I would simply ask that you recall the old admonition that "it's better to instruct than denounce." One last note, though: If all you want to do is tell me I've omitted all the glorious consumer benefits of MERS, don't bother.

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