Friday, October 28, 2011

MERS Is A Dummy Entity That Should Be Disregarded, Exposing Self-Transfers And Other Conflicts Of Interest

In my prior posts on MERS here, here, and here, I likened the MERS system to the Multiple Listing Service (MLS) used by brokers in the real estate industry.  In MLS, each realtor uploads certain data about individual properties into the MLS system, and the system can then be accessed by others to gain information about the properties.  Similarly, MERS allows each of its members (through such members' employees) to access itself and upload into its database information regarding the transfer and current beneficial ownership a of a given loan.  I noted in the past that because it is the MERS members themselves that are performing all the acts, you have a situation where principals are acting on behalf of other principals or principals are acting on behalf of the purported agent (MERS), etc.  The tail is wagging the dog.

Reading the complaint of the State of Delaware against MERS not only vindicated to me the above analogy between the MLS and the MERS system, but also made me think that most homeowners, county recorders, attorneys general, and others may be missing an angle of attack applicable to MERS.

Here is what I mean.  Let's say a bunch of gangsters conspire to use a programmable manikin, robot, etc. to rob an establishment by remotely controlling the manikin and causing it to enter the establishment, fire some bullets, and pick up the loot.  Would you then go after the manikin or the gangsters that remotely controlled it?  Obviously, you would go after the gangsters and regard the manikin as a mere tool and a front to conceal the identity of the true perpetrators.

Similarly, with MERS, it makes sense in many situations to go after the gang..., I mean, banksters who (through their employees) are actually performing the bogus loan transfers and other actions using MERS as a mere tool/front.  One useful theory to do this appears to be the concept of "alter ego."

A corporation is considered the alter ego of its stockholders when it is used merely for the transaction of the stockholders' personal business for which they want to shield themselves from personal liability.  Importantly, a parent corporation is the alter ego of a subsidiary corporation if the parent controls and directs the subsidiary's activities so that it will have limited liability for its wrongful acts.

The same is true of MERS and its members.  MERS is ultimately a subsidiary of its members.  Hence, where a MERS member assigns a mortgage and note to itself using MERS as a front, such an assignment should be seen for what it is: an assignment of a loan by a MERS member to itself.  The MERS entity in such a case should be simply disregarded, so that the self-serving (and often fraudulent) nature of the assignment becomes inescapable.

In other words, in many situations, we don't care that a particular action was ostensibly done by MERS.  For example, we may know that someone at, say, Aurora, OneWest, or some other interposer assigned a loan belonging to a defunct entity to itself and used MERS as a front to conceal their identity on both sides of the transaction, as well as to impede the homeowner in raising defenses to foreclosure.  Such a situation appears to be a solid case for invoking the doctrine of "alter ego" and piercing the corporate veil, so that MERS is considered the alter ego of the acting servicer and is therefore disregarded for purposes of determining the legality of the transaction.

This situation is far from unique.  Dummy entities are disregarded all the time by the law.  Aside from the "alter ego," the most notable example that comes to mind is when the IRS disregards a single-member LLC for federal tax purposes.

People should start challenging the status and function of MERS as a "dummy" entity that obscures the true parties in interest and prevents borrowers and other parties from negotiating with the true parties-in-interest and from raising legitimate defenses to foreclosure and other actions performed by those using MERS as a front.

Delaware vs MERS

Of course, Virginia-based MERS presumably makes so much money, that the taxes it pays into the coffers of Virginia keep a solid veil over the eyes of Virginia Attorney General and most Virginia judges.  One only needs to go into a Virginia public courtroom and hear a judge's reaction to the arguments made in this Delaware complaint.

What needs to happen is members of the media should go to such hearings and write about such issues extensively so that the public are aware of what law Virginia follows (hint: the law of big-big money).

Here's Dylan Ratigan's video report containing an interview with the Delaware AG:

Thursday, October 27, 2011

U.S. Government sues 17 banks to recover losses to Fannie/Freddie from bogus RMBS

I recently ran across a blog entry entitled "The FHFA lawsuit league table."  The author assigns "scoring points" to each of the 17 banks sued by the Fed Government to see who is in trouble the most.  The two close winners are BOA and JPMorgan.

Of course, one would ask (at least in my world), why bail out the banks and then sue them, if you can just let them fail in the first place and not double-spend taxpayer money first on bailouts and then on mass litigation?  To this day, I don't buy the "too big to fail" myth that states that the world will collapse if we let the financials fail.  I don't think most financial industry insiders buy it either, but there's certainly a ton of money to be made by promoting the myth.

Another question to ask is: why take the risk out of the marketplace through government guarantees and then seriously expect that the banks will play by the rules?  Again, of course, most people in-the-know likely did not really expect anyone to play by the rules.  Instead, such people likely realized that the government will do something that "feels good" (provide the guarantees in the name of promoting home ownership), the banks will do something that will make them a lot of money (dump bogus RMBS on the taxpayer), and the government will then do another feel-good thing -- the lawsuits that will take a (small) chunk of the banks' previous "killing" profits while creating the appearance that the U.S. continues to be governed by the rule of law.  What a wonderful system.

In any event, those interested in the lawsuits can track them via the FHFA's site here.

Massachusetts Supreme Court speaks after Ibanez: Bevilacqua v. Rodriguez SJC-10880

Wednesday, October 19, 2011

Fox Business: The Accounting Move That's Goosing Bank Profits

Published October 19, 2011
| FOXBusiness

Look under the hood of bank earnings releases and you’ll see the banks are booking outsized paper gains in the third quarter from an accounting trick that’s legitimate under current rules.
Without the move, some of the big banks -- Citigroup (C: 30.66, +0.78, +2.59%), Goldman Sachs (GS: 103.57, +1.32, +1.29%) and JPMorgan Chase (JPM: 33.21, +0.34, +1.03%) -- would have missed their third-quarter consensus earnings estimates.
Citigroup was able to book a profit, even though its revenue fell when you take out its paper gains from the move. 

Bank of America reported a nice $6.2 billion profit for the third quarter -- but 27% of that profit, or $1.7 billion, came from the paper gains resulting from this accounting move. The beleaguered bank told investors it beat analysts’ earnings estimates. It said it had 56 cents a share in profit. But strip out the paper profits from this accounting move and BofA earns 44 cents a share.
Similarly, Citigroup said it beat analysts’ consensus estimates as well, with $1.23 earnings per share. Not so fast -- take out the $1.9 billion it said it got from this accounting trick and it too misses analysts estimates of 81 cents a share, with a lower 64-cents-a-share result.
There’s more. Goldman Sachs’ 84-cents-a-share loss turns into a deeper $1.66 loss. Analysts were expecting a 16-cent loss. Ouch.
JPMorgan Chase kicked off the third-quarter earnings season announcing it booked $1.9 billion in paper profits from this move. So its reported $1.02 profit morphs into 73 cents a share in earnings.
The move, called a debt or debit-valuation accounting [DVA] gain, “does not relate to the underlying operations of the company,” JPMorgan’s chief executive Jamie Dimon, 55, said in a statement accompanying the bank’s third quarter earnings release.
Same story for Morgan Stanley. Its $1.15 a share result was actually an ugly 3 cents a share when you remove this accounting gain.
The DVA lets banks book in their earnings results paper gains that they get to come up with all on their own. 
Put simply, a bank or company borrows in the credit markets to fund its operations. It does so by issuing bonds, which are essentially loans the bank pays interest on. But the banks' own debt has been getting pummeled lately for a variety of reasons. Namely, the housing crisis, slowing economic growth, Standard & Poor’s downgrade of the U.S. government’s credit rating and chronic worries that Europe’s avalanche of debt problems could ripple through to U.S. banks, among other things.
However, when a bank’s bond drops in value because no one wants them, an odd accounting rule enacted in 2007 says a bank can book a paper profit based on that drop in value, what’s called below par value.
The theory is the bank would realize a profit if it bought back its own debt at that lower value. (DVA’s close cousin is the CVA, or credit valuation adjustment.)
So what that means is banks can include paper gains in their profits based on bets against their own survival -- when the value of their own credit quality worsens. The higher the risk a bank defaults on its debt, the bigger the gains they get to take from DVAs.
But there’s a lot of guesswork here. For one, the banks under the accounting rules get to come up with their own measure of the gains they can take here, based on their assessment of the trading values of their debt. They use widening credit spreads in the swaps market here, for one. When credit spreads widen, that means investors believe there is a deterioration in the creditworthiness of a bank.
Now, all of this doesn’t mean the bank will not pay investors back on their bonds at par when the bonds mature. Banks are liable to pay investors back at par at the maturity date.
But what it does mean is that banks will have to reverse these gains at a later date, under the rules. So, should investors be cheering earnings that really are about the worsening creditworthiness of banks?
And there’s another issue with this accounting move. Remember when the banks squawked and squawked and got the guys who set the rules for how companies must book their profits to back down on what’s called mark-to-market accounting, because the rule would have hammered their profits because of their bad bets?

Read more:

Friday, October 14, 2011

Virginia's increased bankruptcy exemptions benefit debtors

As of July of this year, Virginia finally adjusted some of its bankruptcy exemptions for about 20 years of inflation (the amount of time that passed since the exemptions were last revised).  The motor vehicle exemption is now increased from $2,000.00 to $6,000.00, and the "family gun" exemption is increased to $3,000.00.

Moreover, debtors are specifically allowed by the statute to convert their non-exempt property to exempt property by selling something that would otherwise go to the bankruptcy trustee and buying a car or a firearm to be exempt up to the amounts above.  This is allowed even specifically in contemplation of bankruptcy.  In bankruptcy lawyers' parlance it is known as "bankruptcy planning."

An interesting issue remains with the increased car exemption of $6,000.00.  I have had a number of clients who had two vehicles each worth about $2,000-$3,000.  Both of such vehicles could be brought under the $6,000.00 exemption (and at least some software, after the 2011 updates, allows one to do so), while the statute on its face seems to permit only one vehicle to be so exempt (by stating that only "[a] motor vehicle" can be "exempt from creditor process").

Trying to exempt more than one vehicle under the same exemption (Section 34-26(8)) is an aggressive stance, whose fate will likely be decided by the courts in the near future.  If past practice is any indication, I would not be too optimistic about upcoming rulings...

Nonetheless, an increased personal vehicle exemption is well overdue and is certainly a welcome change.

Monday, October 10, 2011

Fox Business: Foreclosure Settlement Imminent, Bank Sources Say

Sources at Citigroup and Bank of America tell FOX Business that bank officials worked through the weekend and were in close talks with state attorneys general and the Department of Justice to try to wrap up a potential $20 billion settlement that could come as early as this week or next over improper mortgage practices and robosigning.
The would-be settlement involves foreclosure papers that were rubberstamped, allegedly pushing many out of their homes. JPMorgan Chase, Ally Financial and Wells Fargo are also involved in the talks, sources say. 
A number of sticking points could still hang up the deal, these sources add.
These bank sources say the Administration at the same time is pressing ahead on sweeping new guidelines for mortgage lenders nationwide which could be part of the deal, possibly one of the biggest overhauls of an industry since the tobacco settlement in 1998. 
The Department of Justice did not return calls for comment. Bank of America and Citigroup also did not return calls for comment.
The $20 billion deal is stuck on the legal exposures banks would still face in exchange for agreeing to revamp their mortgage servicing practices and paying the billions of dollars in the settlement. Also hamstringing the talks are states who are balking, such as New York and California, due to misgivings over whether the banks’ conduct has been adequately probed.
The plan is to put the final sum, which could vary from the $20 billion under discussion, into a "monetary relief fund” for mortgage borrowers, a fund that’s somewhat akin to the $20 billion BP oil spill victims’ fund for the disastrous oil spill in the Gulf of Mexico. The banks would give loan modifications according to government guidelines, using this money, say Citi and BofA sources.
"But who will get the loan modifications? What are the standards? No one knows yet, and whether this will be done fairly," says a Citi source. Another question: Not all banks committed improper mortgage practices and/or robosigning to the same degree as others. Will their payments into the fund be prorated according to guilt? 
"Good question, it doesn't look like it -- this is a political deal," says a bank official.
Meanwhile, California’s attorney general recently pulled out of the deal, saying it is inadequate because it gives bank officials too much legal immunity for conduct "that has not been properly investigated." California now says it may go it alone to get its own bank deal.
Arizona and Nevada have also taken separate action in suing BofA, according to bank disclosures. And New York’s attorney general also has expressed reservations. Meanwhile, foreclosure fraud class actions against the banks continue to flood in. And fighting has already begun at the state level over the formula for how much each state would get from the relief fund. Federal agencies may want their cut too.
A deal could help restart a clogged foreclosure system that is keeping the housing market down and the economy at stall speed. But how the new relief fund will be run is a sticking point, too.
The government recently shut down a federal program created last year to help homeowners struggling to make mortgage payments. The Emergency Homeowners’ Loan Program (EHLP) spent about half of its $1 billion budget. It had aimed to give jobless homeowners up to $50,000 in zero-interest rate loans for underwater mortgages.
But the government’s poor administration and stiff qualifying rules plagued the EHLP from the start. This program was enacted as part of the Dodd-Frank financial reform law enacted in July 2010. But it didn’t launch until June, due to strict eligibility requirements, and less than half of the intended 30,000 borrowers got assistance.
What happened? Tough income requirements, for one, as the EHLP disqualified people who had landed new jobs after falling behind on their loan payments while being unemployed.

Read more:

Thursday, October 6, 2011

White House Foreclosure Prevention Program Had Minimal Oversight: Report

By Paul Kiel, ProPublica
Why has the administration’s flagship foreclosure prevention program been so ineffective in helping struggling homeowners get loan modifications and stay in their homes? One reason: The government’s supervision of the program has apparently ranged from nonexistent to weak.
Documents obtained by ProPublica — government audit reports of GMAC, the country’s fifth-largest mortgage servicer — provide the first detailed look at the program’s oversight. They show that the company operated with almost no oversight for the program’s first eight months. When auditors did finally conduct a major review more than a year into the program, they found that GMAC had seriously mishandled many loan modifications — miscalculating homeowner income in more than 80 percent of audited cases, for example. Yet, GMAC suffered no penalty. GMAC itself said it hasn’t reversed a single foreclosure as a result of a government audit.
The documents also reveal that government auditors signed off on GMAC loan-modification denials that appear to violate the program’s own rules, calling into question the rigor and competence of the reviews.
Some of the auditors’ mistakes are “appalling,” said Diane Thompson of the National Consumer Law Center, an advocacy group. “It suggests the government isn’t taking the auditing process seriously.”
In a written response to ProPublica questions [1], a spokeswoman for the Treasury Department, which runs the program, denied there were serious flaws in its oversight system, calling it “effective and unprecedented in many ways.”
The audits of GMAC, though revealing, give only a limited view into the program, because the Treasury has refused to release the documents for other servicers. For more than a year, through a Freedom of Information Act request, ProPublica has sought the audits of 10 of the largest program participants. The Treasury provided only GMAC’s audits, because the company consented to their release. ProPublica continues to seek all of the reports.
Abuses of the foreclosure process, in which banks and mortgage servicers cut corners or even created false documents [2] to move troubled borrowers out of their homes, have been extensively documented [3], along withfailures by government [4] to regulate the industry. But the lapses revealed in the documents obtained by ProPublica stand out because they occurred within the government’s main effort to prevent foreclosures, the Home Affordable Modification Program.

Oversight shrouded in secrecy

For HAMP’s first two years, the government offered very little public detail about its oversight efforts. It was virtually impossible for the public — or even Congress — to know how well the banks and mortgage servicers were complying with the government’s effort to prevent struggling homeowners from losing their homes. Those years were crucial, because that’s when servicers evaluated the vast majority of homeowners eligible for a modification — about three million.
The documents obtained by ProPublica show auditors finding serious problems at a major servicer during that time. Instead of publicly revealing the findings, Treasury chose to privately request that GMAC fix the problems.
“For two years, they’ve known how abysmal servicers were performing, and decided to do nothing,” said Neil Barofsky, the former special inspector general for the Troubled Asset Relief Program, better known as TARP or the bank bailout, which provided the money for HAMP.
“It demonstrates that if you have a set of rules for which compliance is completely voluntary and no meaningful consequences for those who violate them, having all the audits and reviews in the world are not going to make a bit of difference,” he continued. “It’s why the program has been a colossal failure.”
Treasury continued to release few details about its audits until June, when it began publishing quarterly reports based on the audits’ results. The public report showed what Treasury called “substantial” problems at four of the 10 largest servicers — Bank of America, JPMorgan Chase, Wells Fargo and Ocwen — and Treasury for the first time [5] withheld taxpayer subsidies from three of them.
Mortgage servicers that signed up for the program agreed to follow strict guidelines on how to evaluate struggling homeowners seeking reduced mortgage payments. In exchange, the servicers would receive taxpayer subsidies. But as we’ve reported extensively, the largest servicers haven’t abided by the guidelines [6]. Homeowners have often been foreclosed on in the midst of reviews for a modification [7] or denied because of the servicer’s error. For many homeowners, navigating what was supposed to have been a simple, straightforward program has proven a maddening ordeal [6].
HAMP has fallen dramatically short of the administration’s initial goal to help three million to four million homeowners. So far, fewer than 800,000 homeowners have received loan modifications through HAMP, or fewer than one in four of those who applied [8].
As part of the $700 billion bailout program, HAMP was launched in early 2009 with a $50 billion budget to encourage loan modifications by paying subsidies to servicers, investors and homeowners. But only about $1.6 billion has gone out so far [9].
GMAC said it agreed to release its audits under the program because the company “believes in honoring the spirit of the Freedom of Information Act process” and “elected to be transparent on our work with the [modification] program,” spokeswoman Gina Proia said.
GMAC's parent company has changed its name to Ally Financial, but its mortgage division is still called GMAC. The government owns a majority stake in Ally because it rescued the company with TARP funds, but both the company and the Treasury said that didn’t factor into the company’s decision to allow the documents to be released.
ProPublica contacted all nine servicers that objected to the reports’ release. All either declined to comment on why they wanted the audits kept secret or defended keeping them out of the public domain by saying the reports contained confidential information. Collectively, these companies have so far been paid more than $471 million — dubbed “servicer incentive payments” — through the program. They are eligible for hundreds of millions more. The country’s four largest banks — Bank of America, JPMorgan Chase, Wells Fargo and Citigroup —are also the largest servicers of mortgage loans.
In its written response, Treasury’s spokeswoman said it agreed to withhold the records in part because they could undermine “frank communications between mortgage servicers and compliance examiners” and hurt the program’s effectiveness. The department declined to provide either redacted versions or an index of the documents.

Monday, October 3, 2011

Virginia Homeowner Defeats OneWest's Motion to Intervene

Here is an example of how banks "pretend" to own your loan.  The fertile ground for bank fraud exists where a bank or other institution sells a loan, but retains the "servicing" rights to it.  If you what to know and understand more about servicing rights, take a close look at your deed of trust or mortgage (around par. 20 or so).

So a bank may, for instance, claim to own your loan even if it doesn't, just because it did own it at one point and because it still owns the servicing rights to the loan -- i.e. the bank can show that it still has something to do with your loan, even if it's not true ownership of the loan.

I recently had a case where my clients sought to nullify a defective deed of trust by filing a lawsuit in Fairfax County, Virginia to quiet title against all parties.  An interesting thing arose when OneWest, a party not named in the lawsuit, tried to intervene as the purported current owner of the loan and successor to the original "Lender."  

Of course, we asked OneWest: who are you and what do you have to do with the instant litigation?  OneWest, in turn, claimed that the loan was previously owned by IndyMac and that, as IndyMac's successor (through FDIC receivership in 2009), OneWest had acquired all of the assets of the failed IndyMac, including the subject loan.

We pointed out an obvious and rather glaring discrepancy with OneWest's claim: conspicuously absent from OneWest's request to intervene into our lawsuit was any evidence that IndyMac still owned the subject loan when it failed and when its assets were seized by FDIC and transferred to OneWest in 2009.  We pointed out that the loan had loan been gone from IndyMac's books by 2009, so that even if OneWest had acquired every pen and paper clip of IndyMac, it could not have acquired the subject loan.

On the eve the hearing ....  drum-roll....  OneWest withdrew its request to intervene and subsequently disappeared.  

Given that there are rather few pro-homeowner rulings in pro-establishment Virginia, it has been a rather common strategy of the banks every time they are pinned down: disappear rather than risk an adverse ruling.