And all the fuss about bad paperwork on mortgages is too. The real game is hidden on the dotted line.
by Jim Moriarty & Taylor Lindstrom
Back in 2008, The Economist painted a grim picture of what the Era of Foreclosure looked like as homeowners began to walk away from houses worth less than the mortgage payments they were making. For a while, it looked like homeowners were going to screw over their lenders.
Then the tables turned. Lenders started to foreclose on homeowners who didn’t want to walk away. The headlines started to tell sad tales about middle-class families who had lost their jobs in the recession being turned out on the streets by super-speedy foreclosures with no room for re-negotiating mortgage payments. Most recently, we’ve been hearing terrifying stories about “foreclosure mills“, who fudged the paperwork so that they could throw homeowners out more quickly – even if the homeowners should not have legally been foreclosed upon.
We hate to be the bearers of bad tidings, but these scenarios are hardly the worst of the foreclosure crisis. Homeowners sticking it to lenders, lenders sticking it to homeowners – it’s bad, it’s definitely bad.
What’s worse is that both the homeowners and the lenders are getting screwed over by a third party.
And neither of them knows.
How Mortgages Work
In theory, the mortgage process is pretty simple. Jim wants to sell his house. Bob wants to buy Jim’s house, but Bob doesn’t have enough money, so he asks the bank for a loan. The bank agrees to buy the house for Bob and sell it to him gradually over time, so long as Bob pays the bank extra money beyond the house’s value for the inconvenience of the bank taking the risk. Those payments are mortgage payments.
So far, pretty simple. Jim gets a benefit: he sells his house. Bob gets a benefit: he gets to own a house without having to put up all the money at once. The bank gets a benefit: they get to use Bob’s house as an asset against which they can loan money.
And everyone is happy.
Until someone came up with the idea of securitization.
Half-Baked Mortgages
To understand the legal problems inherent in securitization would take several years of schooling and a strong stomach, so we’ll defer to a metaphor.
Imagine you are about to open a bakery whose main product will be wedding cakes. You need money for your very first commission. So you ask friends to invest in the theoretical value of your cakes over time, which they happily agree to do. They wouldn’t invest in one cake, because the chance that a single cake might fail is significant. But for lots of cakes, they think it’s worth the risk of investing. Even if one cake falls flat, other successful cakes will make up the difference.
So you get money for the cake, and your investors get to see your cake shop thrive and become profitable. Since they want their initial investment in the cakes to continue to grow, they leave their money happily invested in your cake shop, while cake after cake proves its value.
Unfortunately, when it comes to mortgages, the cake is a lie.
When mortgages are securitized, banks sell shares in a group of houses to which they own the mortgages. During the housing boom, mortgages were theoretically a very solid investment. It was a given that house values would always rise steadily over time, so the investment would continue to grow and grow until the investor decided to back out of the deal.
Except that housing prices started to fall, and homeowners started to run delinquent on their payments. Investors started to back out of their deals while the getting was good, and banks moved to foreclose before the houses could lose more of their value.
Which is when they made a disturbing discovery: no one owns the mortgage.
Lots of investors own a crumb, but no one owns the cake.
The Name on the Mortgage
There is always a name on the mortgage. Legally speaking, someone – or at the very least, some entity – has to be the official owner.
Unfortunately, a great many people involved in the current rush to foreclosure seem to believe that the name on the mortgage does not have to be the actual owner.
This makes sense to a certain degree. After all, the “owner” of a property might be a pool of a hundred or more investors. It would be impractical, not to say impossible, to write a mortgage stating that each of those investors was an owner of one fraction of the property.
But perhaps someone should find a way to do so, and quickly. Because with all of the scrutiny surrounding the shoddy paperwork being filed by the foreclosure mills, a strange fact is coming to light: it seems no one has the right to foreclose.
The owner can foreclose. But there is no owner. There’s only the name on the mortgage, which, in most cases, is the decidedly inhuman-sounding MERS.
MERS
Mortgage Electronic Registration Systems, Inc. was originally created to track who officially owned a mortgage at any given time.
It is somewhat ironic that today the company’s entire purpose would seem to be disguising that very ownership.
As with almost every national crisis, the problem began when people tried to cutting corners. MERS charges a small fee every time a new owner is added to a mortgage – which means a lot of fees when a mortgage is securitized to a pool of a hundred or more people. So lenders started to list MERS on their records as the official mortgagee – a title MERS justifies by claiming status as a “nominee” for the investors.
This means that the lender’s name may never show up on the mortgage documents at all.
Which brings us to the current problem, the one no one is talking about: no one has the right to foreclose.
The banks could, if the banks’ names were on the mortgages – but they’re not.
The investors could, if the investors’ names were on the mortgages – but they’re not.
Foreclosures, it would seem, are rapidly becoming illegal.
The Gathering Storm
What we’re seeing now in the foreclosure crisis is nothing to what’s to come. Right now, lawyers are trying to figure out whether foreclosure documents have been properly filed, signed, and notarized, as well as whether foreclosure is even warranted, since there have now been multiple cases of homeowners being foreclosed upon without ever missing a mortgage payment.
But that’s not the real problem.
The problem is that even when the homeowners are delinquent in their payments, even when they abandon the home because the actual value is less than the dollar amount they agreed to pay, even when the foreclosure papers are perfectly signed, filed, and notarized, there is still one problem that no one can fix:
No one owns the mortgage.
Which means no one can take it back.
When that single fact hits the general public, chaos will ensue. And we’re simply not prepared for the consequences. It’s time for the United States government - who happens to be our biggest investor in mortgages right now, since Wall Street dumped all those dwindling assets on them while the getting was good – to give up the idea of foreclosing and start renegotiating mortgage payments.
Being sure, this time, to put someone’s name on the line that says “Mortgagee.”
Someone other than MERS.
Let’s say you want to buy a house.
You make somewhere around the average American salary of $60,000 a year (that’s $49,000 after taxes), so you don’t have enough money stashed away to buy a home outright. You get a loan from Bank of America, which gives you a lot of standard paperwork to sign and tells you that you now have a mortgage loan with them. You begin to make payments against that mortgage in the fond hope that one day, you will pay off the mortgage altogether and you will own your home outright.
But then you lose your job. You miss a mortgage payment. Then another. And another.
You receive a notice in your mailbox that you are delinquent on your mortgage payments and that your house will be foreclosed upon. It’s written on paper that features the Bank of America logo and is signed by a Bank of America employee, which doesn’t surprise you at all. After all, you took out a mortgage loan with Bank of America. Bank of America can certainly foreclose on your house – it’s the lender.
Isn’t it?
Neither a Borrower Nor a Lender
Not only is Bank of America not a lender – it’s also not, insofar as mortgages are concerned, a bank.
A bank is an institution for the custody, loan, exchange, or issue of money. For Bank of America to have acted as a bank for the thousands of homeowners who are answering to its foreclosure notices, it would have had to loan those homeowners money. Naturally, as security against its loan, it would have gotten a promissory note and a mortgage loan agreement.
It did none of these things.
The name on the mortgages isn’t Bank of America. It’s MERS, theMortgage Electronic Registration Systems, which was created during the housing boom specifically to address the needs of banks who wished to securitize the massive amounts of property they were acquiring. The official owner of the property – if a promissory note could be found, which in many cases appears to be an impossible task – is a pool of investors who are generally unaware they own a property at all.
Bank of America never owned the properties it spent the last decade so blithely selling as securities to investment firms – it’s easy to tell; its name isn’t on the paperwork. It never actually loaned would-be homeowners money for their homes – it’s easy to tell; its name isn’t on that paperwork, either. It holds neither promissory note nor mortgage nor deed of trust.
Yet, somehow, thousands of people are being foreclosed upon by an institution that they believe, irrevocably, is acting as their bank.
This is an enormous mistake.
The Loan Servicer in Bank’s Clothing
How does Bank of America profit from a foreclosure? If it owned the property, a foreclosure would mean taking a loss on the original investment, and it’s unlikely it would be pursued unless there was no chance the borrower would be able to make good on the loan under any circumstances. Otherwise, it would be in the best interest of the owner to renegotiate the loan and continue receiving smaller payments for a longer period of time.
As we’ve established, however, Bank of America is not the owner. According to the paperwork, Bank of America never had a stake in the mortgage at all. Its name appears nowhere. It is neither the lender nor the note-holder nor the mortgage holder. Bank of America has been foreclosing on its tenuous authority as loan servicer – in essence, the collections agency.
It’s a clever con. Imagine a policeman approaches you, tells you that you are trespassing, and asks in a commanding tone to see your identification. Most people would oblige immediately and without question, and would certainly never dream of asking the policeman to prove that he is, in fact, a policeman. Imagine being handcuffed, arrested, and obliged to spend a night in jail, only to realize the next morning that the policeman whose commands you have obeyed unquestioningly is not actually a cop.
This is the situation in which thousands of homeowners have found themselves. They have received a notice of foreclosure from an institution with the word “Bank” in its very name. They are told that they are delinquent on payments and must vacate their home. One day they return to their house to discover that the locks have been changed and their possessions placed on the sidewalk. They plaintively appeal their case and attempt to renegotiate their loans or offer alternatives likeshort sales.
They do this all the while unaware that the bank foreclosing on them is not actually a bank.
If it were a bank, it would have every financial reason to renegotiate the loans. As it stands, Bank of America only profits if it eschews its responsibilities as a bank – and looks to its responsibilities as, well, a company who wants to make money very badly indeed.
Making Money Every Way But Honestly
The federal government recently rolled out a loan modification program designed to incentivize banks to renegotiate with homeowners and come to new terms on their mortgages. Immediately after this program was instated, Bank of America suddenly became amenable to many homeowners’ pleas to reconsider. It agreed to look over the paperwork – and in doing so, made itself eligible for a government payout for each of the relieved homeowners.
The government made the same mistake as the homeowners: the loan modification program was predicated on the notion that the government was dealing with a bank. What it wound up dealing with was the con artist.
After Bank of America received its governmental checks, it changed its tune again. The homeowners were told they did not qualify for a renegotiated mortgage, and foreclosures continued at the same crackerjack speed as before, often leaving homeowners in even greater debt. For its trouble, Bank of America had gotten a double profit: public approval for participating in the program and a monetary reward from the government. The agreement was that they would considerrenegotiation. There was never anything in the fine print about meaningit.
When foreclosures resume, it’s time for another round of profits for B-of-A. As loan servicer, it used to make money by earning a small fraction of your mortgage payment for “servicing”. If you are delinquent in your payments, however, the loan servicer now has an excuse to go for the big bucks: foreclosures entitle the loan servicer to a much, much larger payout. When you’re paying your mortgage on time, the servicer only gets to collect a fraction of your payment.
If you default on your mortgage, the servicer gets to collect a fraction of the entire remaining cost of your house. Of course, the actual owners of the property -Â the investors – are getting screwed. But to Bank of America’s way of thinking, that’s not a problem.
Technorati Tags: business, Crisis, economy, finance, foreclosure, housing, jim moriarty, mortgage payments, taylor lindstrom
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