Rate Watch #745 MERS. Foreclosures.

Rate Watch #745 MERS and Foreclosures.

October 22, 2010
by Dick Lepre
[email protected]
www.loanmine.com

Product	Rate	Points	Est. APR*
CONFORMING LOAN PRODUCTS (Loans less than $417,000)
30 Year Fixed conforming
	4.000%	1.00	4.14%
	4.25%	0.00	4.21%
15 Year Fixed Conforming
	3.375%	1.00	3.64%
	3.625%	0.00	3.74%
High-balance CONFORMING LOAN PRODUCTS (Loans greater than $417,000 and less than Hi-Balance amount for your county)
30 Yr Fixed Hi-Balance
	5.125%	0	5.19%
	4.625%	1.0	4.79%
15 Yr Fixed Hi-Balance	4.125%	0	4.27%
	4.00%	1	4.14%

* conforming loan limits for 2010 are:

1 unit $417,000
2 units $533,850
3 units $645,300
4 units $801,950

Note that the above table now means something different than it used to. "Conforming" now means "traditional conforming" (<$417,000 for SFR is the new jumbo-conforming which depends on county.) You can find the new High-Balance Conforming limit for your county here. That page says "FHA" but those amounts also pertain to FNMA & FHLMC.

You must not read these as quotes because the rate and price which you will get depends on your precise situation and is affected by, but not limited to, the following factors: credit scores, property type, occupancy, income, value of property, length of time of the rate lock, whether of not values in your area are declining, and cash out (if refinancing).

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II) Fundamentals

Initial Jobless Claims were 452,000 a smidgen below consensus. LEI (Leading Economic Indicators) was +0.3%. The problem with LEI is that the biggest component is Money Supply ) but there has been a consistent disconnect between both money supply/low interest rates and growth. Glass half-full Bloomberg.com interprets this as "signaling the recovery will extend into 2011." I am not sure what recovery they are talking about.

Housing Starts: Actual 610K, prior 598K
Building Permits: Actual 539K, prior 569K

China raised interest rates 0.25%. Talk about exchange rates and tariffs has become part of the political discourse. This is very dangerous stuff and a topic which politicians do not understand well enough.

III) The Technicals

The daily is bearish. The weekly is bearish. The monthly is bullish.

For those who are not longtime readers, the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

Forget the techs. In fact forget the fundamentals. In the short term, mortgage rates will be driven by the Fed as it pushes Treasuries where it wants. In the long run this will result in what I wrote about last week which is inflation and much higher mortgage rates. For now everyone should be poised to act if rates drop again and everyone with and adjustable should dump it for a fixed if they intend to stay in their home for more than three years. Folks with high balances on HELOCs should either refinance and pay then off or call the HELOC lender seeking to fix the rate.

 

V) MERS and Foreclosures.

I have been asked by many regular readers to comment on this and am doing so.

This discussion about MERS and foreclosures has gotten seriously off track.

Why is there a foreclosure mess? A simple answer is that state laws regarding foreclosures are hopelessly out of date and were never designed to handle the volume we now have. Chase says that the average time it takes to foreclose in Florida is 678 days. In New York it was 792.

If you take out a mortgage on your home and don't make the payment as specified the lender as specified in the paperwork has the right to institute foreclosure and take your property back in order to sell it to recover part of what it is owed.

Sounds simple enough. One important point is that it is the laws of individual states which specify how the process must proceed. The broadest generalization is that there are two types of foreclosures: judicial and non-judicial. Some states have judicial. Some states have non-judicial. California (where I do my business) has non-judicial. (Some states have both judicial and non-judicial.) Judicial foreclosures must be instituted by court action. This is done by filing a lis pendens (lawsuit pending) in the recorders office for the county in which the property is located.

In non-judicial states the lender does not have to start with court proceeding but must obey the terms of the note and deed of trust and state law. If the borrower misses, say, two payments the lender will send a certified letter to the borrower called a default letter and file a Notice of Default with the County Recorder. At this point this is a matter of public record. After a certain time has lapse since the Notice of Default the lender can sell the property to the highest bidder. This is done in a very public place such as the steps of City Hall. If no one bids then the lender owns the house.

So what's so complicated? For one thing I have abbreviated things here. It is not really the lender which instituted the foreclosure but the trustee. The trustee is the party named in the note designated in the agreement between the borrower and the lender to carry out the lender's dirty work. The trustee is not a neutral party. The trustee acts in the interest of the lender.

If you have been reading about this you have heard of MERS. MERS is a company which acts on behalf of the mortgage industry. It does two things. First it creates a MERS number to go with each mortgage loan and it uses that to track the ownership of each mortgage as it gets securitized and/or resold. Second, MERS is the designated trustee on deeds of trust (mortgages in non-judicial foreclosure states). MERS holds legal title to the mortgage as agent for the owner. MERS is, in a sense, the equivalent of the County Recorder's Office. Anyone can go there and find out who owns the loan and who services it.

One of the statements I have heard is that mortgage securitization has somehow broken the chain of ownership and that with a broken chain of ownership the lender cannot institute foreclosure. I believe that this is nonsense. MERS makes publicly available online the ownership of some 64 million loans. See this page. Note here that one must distinguish between the loan servicer and the investor. The servicer is the entity whom you mail your check to. They bank the funds received and send almost all of the payment to the investor collecting a small fee (a percentage of the payment) each month for their service. You will find that some MERS online entries have the servicer but not the investor. MERS view is that all you really need to know is the servicer. Since MERS is the trustee it makes no difference whom the money eventually goes to. What MERS has tried to do (and I guess that this is one of the points contested in court) is to keep itself as trustee even if the interest in the loan is sold and resold. This means that whenever your loan is sold, it is not necessary to record a new "assignment of beneficial interests." The borrower need to be cognizant of 1) the servicer because that is who is getting the payment and 2) the fact that MERS is the trustee and as trustee for the mortgage they will instigate the foreclosure process if payments are not made.

The investor may be FNMA and the ownership of your loan may be pooled with many others and resold but that does not create any break in the chain of title. This securitization of debt is not exclusive to the mortgage industry. Credit card debt is sold also so that the folks you send your credit card payment to forward most of the payment to whomever purchased it from them. The collateralization of debt does not create any break in ownership which somehow makes it so that you don't really owe anyone.

In MERS words: While this information is tracked through the MERS System, the paperwork still exists to prove actual legal transfers still occurred. No mortgage ownership documents have disappeared because loans were registered on the MERS System. These documents exist now as they have before MERS was created. The only pieces of paper that have been eliminated are assignments between servicing companies because such assignments become unnecessary when MERS holds the mortgage lien for the owner of the note.

I don't believe that physical possession of the notes and deeds of trust determines ownership. I can retain physical possession of the note and deed of trust and have transferred ownership. When someone valet parks my car I am giving them possession of it. I am not transferring ownership interest. Ownership does not necessitate possession.

Another complaint and one which has more validity is that this process involves people who sign affidavits stating that they have read all the paperwork. This has been referred to as "robosigning." This is likely correct. They have often not read all the paperwork. They were assured by their employer that "the ducks were in order" and asked to sign the paperwork. This may be an issue with some states because judges may say "No. You cannot do that." If they can't do that then they have at actually read what they sign before they sign it. Period. Lenders and MERS will have to carry out what courts decide. Lenders and MERS cannot merely say that what they have done is materially sound they must obey the letter of the law. Even if foreclosure laws are antiquated and dumb they are still the law and no one has the right to decide that because they think a law is dumb they can paperwork around it. I see zero evidence that somehow mortgage securitization and MERS has tainted the chain of ownership. The only question is: will courts force the person who signed the affidavit to actually read it. This "not reading the paperwork" runs both ways. People also robosign Deeds of Reconveyance stating that your old mortgage is paid off without actually reading them. Does the same "robosigned documents are invalid" logic dictate that you still owe the 4 mortgages that you paid off with refinancing in case someone finds that the person who signed that never read it?

This is where there is a disconnect between the real world and the legal system. Let me ask a simple question: What percentage of the paperwork signed in this country is actually read by the person signing it? Did you actually read the 14 page statement you got when you last updated the software on your smartphone? Did everyone in Congress actually read the health care bill which they voted on? Better yet, did anyone in Congress read the health care bill they voted on? Is a law invalid if no one who voted on it read the bill? Did you really read the 25 pages you signed when I first sent your loan application? Did you really read all of the paperwork you signed when the notary showed up at your home with the loan docs? Is every lawyer going to read every page of every brief filed? Are judges and magistrates going to hold themselves to the same standards and actually read every arrest or search warrant they sign? Do you believe in Santa Claus?

The issue that this will somehow create a crisis because foreclosures get delayed is legally irrelevant. The only thing I see changing is that people will actually have to read that which they sign. Well, judges won't and Congress won't but mortgage holders will.

One other point which has been raised it that some foreclosures may have been done through law firms which short-circuited the process and fraudulently reproduced missing documentation. If this happened then those firms (and the people who hired them) should be accountable and fined or arrested but the borrower who did not make his payment should not gain unjust enrichment. If any law firm specializing in foreclosures incorrectly stated what was owed or scammed documentation then they should be accountable for their misdeeds but this in no way alleviates the borrower from either the responsibility of making their mortgage payment or the consequences of not making them.

I am sure that there are cases where the original note was lost or destroyed and the lender cannot produce it. In these cases a court will have to decide if there is ample evidence that the note existed. If someone is trying to prevent foreclosure and I were an attorney for the lender I would ask if the person had paid cash and I might also ask them why they had been making monthly payments before they stopped. If I were a judge I would want to look at the evidence. If I were a judge seeking reelection I would might say whatever I thought would get me the most votes.

Another issue that was discussed is whether homes acquired through foreclosure would be able to get title insurance because title companies might be unwilling to provide title insurance fearing clouds on the title. This has one solution. Every lender which forecloses will have to agree to indemnify title companies for any losses if the foreclosure is subsequently deemed to not stand.

The fact that every state attorney general is launching an investigation into this serves, for me personally, as a reminder that these are folks with political ambitions. Defending homeowners against evil banks is good PR. I find considerable irony in the fact that the guy who is AG of the State of New York and likely going to be the next governor was the same person who, when he was head of HUD, demanded that FNMA and FHLMC loosen their lending standards.

The fact that there is now a foreclosure mess makes it likely that more people will decide to stop paying their mortgage and this will create more pressure from politicians to make lenders do loan modifications. The problems will be the same: folks don't understand that the servicer may not be the owner of the loan. Many people still cannot make their payments even if the rates were lowered to present market rates. The natural solution would be to not support the housing market with new programs and simply let values fall, foreclosures take place and the housing market return to normal. What we may be doing is only prolonging the agony.

If you have something to add to this discussion please post a comment on the blog.

 

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Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
DRE License # 01143973
[email protected]
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 244-9383
(866) 488-2051 fax

California Department of Real Estate - real estate broker license #01201643

Comments

[Mike Hall]

Well said. The concept of unjust enrichment will need to be observed, or else we'll have total chaos. If courts operate as political beasts, rather than serving justice, we'll have more corporate witch-hunting and it will simply push costs onto the good folks who DO pay...and gold into the pockets of the unworthy and their attorneys. If you're someone who DOES pay your bills, you should be prepared to head down to your the local courthouse and make the very un-PC protest against the "poor borrower" and FOR the big bad bank.

[simon l]

MERS does not allow the homeowner to know who has an interest in the money owed, and servicer Banks have no contractual or beneficial interest in the mortgage and note. The note is the contract, not the mortgage. The mortgage is never sold.
The note is bought, sold, and traded - sometimes more than once (i.e, a note is copied and the copies are sold simultaneously to different entities. Those entities have nothing to do with the mortgage lien)
Only the original lender, named on the mortgage, has the right to foreclose.
The right to foreclose and the right to be repaid must be held together, by the same entity, for a foreclosure to be valid.
MERS allows securitizers to separate the mortgage (right to foreclose) from the note (right to be repaid). The lender no longer has a right to be repaid once the lender sells the note to a securitizer. The mortgage was never assigned to the securitizer and it does not have the right to foreclose.
Those assignments never happened, because the fraud (selling the note for full price to several entities at once) would be revealed if it was necessary to record each assignment.
A lender cannot claim a default because it was repaid in full. In securitization, the servicer works for the securitizer, who must answer to the investors. The investors have a right to be repaid by the securitizer. The servicer does not have a right to be repaid. In a loan pool failure, the securitizer may or may not have recousre against the seller of the note, but not against the homeowner. When a default or rescission occurs, the servicer stands to make a huge profit if it can make it appear that the servicer has a right to foreclose. By using MERS, the mortgage industry has made huge profits at the expense of investors and homeowners.
The note debt may be owed and the obligation to pay may be valid, but it is an unsecured obligation. To make it seem like it is still secured by effecting a false affidavit of mortgage and note assignment is fraud and a violation of the homeowner's right to possession. And for any one other than the person with a right to be repaid to attempt collection of even a valid unsecured note debt is theft and fraud. MERS facilitates this theft and fraud. The Bank has lost nothing. The securitizer is reimbursed for loss under insurance or a PSA between it and the lender that has nothing to do with the homeowner. Both the lender and securitizer will claim losses under an insurance contract, and will thus lose nothing. The investors may certainly lose - but MERS was not mentioned when the investors took risk. The homeowners were never told that thier homes were no longer secured by a valid mortgage, for obvious reasons. At the same time, homeowners were not repaying the correct persons - and that was never disclosed, either. When the servicer took a home in foreclosure under MERS, the opportunity for a homeowner in detriment to claim bankruptcy against that unsecured debt was negated, leading to homelessness while all others in the game were repaid.
It is those fraudulent foreclosures that lowered home values, not the troubled borrowers. Would you have the same reaction if these people would have been able to keep thier home value in the case of job loss? Please understand that as long as MERS exists, it could happen to anyone, even a homeowner with no current problems. If you have a MERS mortgage, I suggest that you contact your servicer and meet up with them so you can see the Note you signed, in person. Find out whether you are truly paying your hard-earned money to the person who has a right to be repaid - don't take the servicer's word for it if it announces that it is the agent, ask to see the original authorization documents. Copies are too easy to manipulate. Then, contact that real party and find out if it was ever assigned a mortgage to your house by the lender. You will be shocked at all you discover in this mess, and maybe you will not be so harsh with those who are suffering the most in this debacle.

[Dick Lepre]

Simon,

I really do not understand your point. If anyone sold the same whole mortgage to several different entities by representhig that they were the only people buying it then they were commiting fraud. Alleging that fraudulent foreclosures were in any way the cause of the mortgage mess is totally false.

Everyone who signs a note and deed of of trust (this is what is done in California) gets a copy. The deed of trust is recorded. If the servicing of your loan is sold you will first receive a "goodbye letter" from the old servicer which give you the name, afddress, phone and loan number of the new servicer. Within 2 weeks you will receive a "hello" letter from the new servicer. The MERS online publically accessible database also has the holder of the note for most notes.

[Disabled Dad]

I know this is an old blog but Dick Lepre, YOU DON'T KNOW SHIT ABOUT ANYTHING!. Your last statement is based in a perfect world. Everything Simon said is true and 10X more. I know it, I'm living it. Those people in the process of signing the note and deed, blah blah. Those things didn't happen that way. I had the loan terms completely changed from 30 yr Fully Amt loan to a 10/20yr Interest Only loan.Mistake made was they gave me the TILA for the first loan and then gave me the 2nd TILA and then a 3rd TILA. Now if I hadn'tpassed the test for the requested loan 1st TILA I would have been aware of it.It was sent to the Residential R/E Div BofA. This is due to a little law stating that I have to be provided with that denial. I wasn't so why would it be necessary to go to the 2nd TILA and create ANOTHER APPLICATION oh and go thru the Warehouse R/E div of BofA. Now thereis so much more in my case alone where criminal and civil violations pop up. You are either one of them or just plain stupid