Justice John Levanthal, writing for the unanimous four judge panel in New York’s appellate division, just decided the case of Bank of America v. Silverberg, (Bank of NY v. Silverberg, 2011 NY Slip opinion 05002, App Division, Second Department. June 7, 2011.) involving an attempt by Bank of New York, as trustee for a mortgage-backed security trust, to foreclose on a delinquent mortgage supposedly held in a MBS trust. The appellate court held that the bank didn't have the right to foreclose because it could not prove that it had legal ownership or physical possession of the promissory note and mortgage signed by the original lender, which was Countrywide Mortgage and the borrowers, the Silverbergs. Countrywide was absorbed by Bank of American in 2008 when Countrywide was crashing.
Levanthal’s opinion noted, at page 1, that:
This Court is mindful of the impact that this decision may have on the mortgage industry in New York, and perhaps the nation. Nonetheless, the law must not yield to expediency and the convenience of lending institutions. Proper procedures must be followed to ensure the reliability of the chain of ownership, to secure the dependable transfer of property, and to assure the enforcement of the rules that govern real property
(For the Impact on Michigan mortgages of a similar decision there, see Muskegon Foreclosures Drop 97% after Court Order+* by Muskegon Critic.)
The New York case’s holding , if sustained on appeal by NY's highest appellate court, could bring down the nation’s biggest Banksters, as well as affecting the validity of millions of property titles throughout the 50 individual states. This is to say nothing of clogging courts across the country with fraud suits, both from homeowners and from purchasers of the Banks’ mortgage-backed securities. That is what this decision could do, if Congress doesn’t pass a few retroactive laws in the attempt to legalize the Bankster’s illegalities.
The problem for Congress, however, is that property law has historically been strictly a matter for the individual states to decide and control. However, the states’ attorney generals could come to the Bankster’s rescue. They could effect a global settlement with all the banks at once, and make all their nasty problems go away, but at least a few attorney generals are threatening to put some cogs in those cover-up wheels.
There is a slight hope for consumers and investors, because several state attorney generals are baulking at joining in an ex post facto "fix-it"for fraud. New York Attorney General, Eric Schneiderman, actually seems intent upon actually investigating and possibly, miracle of miracles, even prosecuting the Banksters’fraud as fraud. (Unless, that is, he has been sleeping with prostitutes, texting his penis pics around, or similarly subjecting himself to the Banksters almost inevitable blackmail efforts to derail his efforts.) But that is getting ahead of the story.
Countrywide, who gave the Silverberg’s their original loan, was one of the U.S.’s biggest lenders, and had been the equivalent of a puppy mill in generating mortgage loans which were then used as assets to fund the mortgage-backed securities which the big banks sold to all their investment customers.
Countrywide is now notorious for having given loans to folks who had no hope of maintaining payments, even if the adjustable rate mortgages they received didn’t increased at all, which of course they did.
Countrywide and similar companies gave loans out like free kittens, then lumped the mortgages together and got them passed off as AAA or AA securities by the rating companies for sale to millions of investors, including institutional investors, as mortgage-backed securities (MBS).
These "lumps or tranches" of loans were put into trusts by the big banks ( Fannie Mae, Freddie Mac, Bank of America, GMAC, Washington Mutual, Wells Fargo and AIG's United Guaranty Corp., among others. Bank of New York was a major trust administrators.)
The big banks acted as trustees for the trusts, which they created to sell shares as certificates of undivided interests to investors. But the laws setting up the trusts -- and 80% of all these trusts were set up under New York law, see http://www.nytimes.com/... -- which had very special rules governing their validity. The mortgages to be placed in the trusts had to be specifically identified and all the relevant documents transferred to the trustees within a narrow time span of formation to be protected from normal tax consequences. And only productive assets could be accepted into the trusts.
To meet these short deadlines, the big banks joined together to use the Mortgage Electronic Registration System (MERS), in effect, an electronic bookkeeping service, to carry out the rapid transfer of the mortgages into the various trusts, by-passing normal state recording systems by simply transferring the mortgages in their own computer records.
MERS was named in the original mortgage loan documents as the lender’s "Nominee". The name which would be registered as the name of record on the initial recording of the mortgage at the local recording office. MERS, however, was never given any ownership rights over the promissory notes or mortgages underlying the loans by the original lenders and borrowers. (Had MERS had ownership rights it would have had to pay taxes itself rather than act as merely a pass-through entity).
The New York Appellate Court held that since MERS itself never held the right to the promissory notes or mortgages, it did not have the legal capacity to transfer these rights to third parties, and therefore its attempts to transfer them to Bank of New York were a nullity. Thus, Bank of New York never received the rights to the original promissory note and without that right or physical possession of the note, they could not foreclose on the mortgage.
(Land recording in most of the U.S. has historically been done on a county by county basis. The county recording offices where the property was located heretofore kept track, according to individual state laws, of who owned property, who they sold it to and who held mortgages or other liens on the property. Fees were charged for each transfer of a property, or transfer of a mortgage or lien, so the counties made money from the recordation of each property transfer or lien event.)
The big banks intended, by putting all the mortgages in the name of MERS, to be able to quickly transfer the mortgages into the various mortgage-backed securities trusts that the banks were creating. But first they had to pass to the companies and their servicers who were pooling the mortgages. They thought they could avoid the time lapses caused by the need to re-record the mortgages in the name of the poolers and then the new trusts and at the same time avoid the individual recording fees. MERS would simply transfer ownership in their electronic records while keeping the MERS name as nominal owner on the original county recording records.
MERS, the nominee named in the original loans, never actually owned anything at all, they never lent anyone any money. MERS didn’t even have any employees. They were essentially a computer program generating records. MERS became the nominal owner of 65 million of the U.S.'s mortgages, some 60% of all outstanding mortgages to date. Now over nine million mortgages are or will be in foreclosure this year. (http://www.thenation.com/...).
Then began the massive waves of home owners (and now business property owners) defaulting on the mortgages that had been sold to investors as "AAA" or AA mortgage securities. When the big banks, trustees for the mortgage-bank security trusts, wanted to foreclose, many even used the name of MERS as the plaintiffs in the foreclosure suits against the delinquent owners.
But, under virtually every state's land laws, in order to foreclose on a property, you have to be able to prove you are owed a debt by the delinquent owner through possession or assignment of the original promissory note as well as the mortgage allowing you to foreclose to collect the debt.
When attorneys for the delinquent borrowers began to demand that the MERS or the bank plaintiff prove they had both the promissory note and the mortgage document, the attorneys acting for the banks discovered that the documents were not in their client’s possession , nor had they been legally transferred into the possession of the various trusts as required by the trust laws from the original lender or subsequent lawful assignees. MERS, however, had never received the legal right to further convey them under the name of MERS.
In an attempt to cover this lapse, attorneys for the foreclosing banks began madly scrambling , ex post facto, to create documents which made it appear that the transfers had been legally effected, filing fraudulent documents with the courts purporting to show that the original documents had been transferred (thus the spate of fraudulent robo-signings).
Some honest judges threw out the foreclosures because the banks couldn't prove ownership, other judges just accepted them and ordered foreclosure. (This latter procedure was the rule in Florida where they had brought back retired judges to speedily hear the thousands of cases that clogged the normal dockets. Speed, not respect for legality was the order of the day.)
As a result of the MERS name appearing on the initial land recording, however, and MERS failure to accurately note the various transactions that took place thereafter (which may have been intentional to make it difficult for purchases of the mortgage-backed securities to investigate the financial viability of the underlying mortgages), and the failure to legally convey the needed documents to all the trusts of the MBS, the borrowers who were being foreclosed upon frequently had no idea who actually owned their mortgages and who had a right to foreclose. (Or which company had the right to modify the original mortgages under the recent HAMP laws.)
Trying to track down this crucial information was a nightmare for borrowers. The banks and/or their MERS were so sloppy about the paperwork that some owners who never had a mortgage loan at all, actually were foreclosed upon by court order, although they never owed money to anyone. (http://www.bloomberg.com/....)
When a MERS nominated mortgage held by the Silverberg family in New York State became delinquent, Bank of New York, as trustee for the trust holding their mortgage, which had been assigned to the trust in the name of MERS, tried to file a foreclosure action against them. When the Silverberg's attorney demanded that Bank of New York produce its proof of ownership, it couldn't do so, but the lower New York court judge allowed the foreclosure anyway.
The Appellate Division court in New York reversed that foreclosure, holding that New York law required the forecloser to have legal possession of both the promissory note and the mortgage securing the debt at the time the foreclosure was filed. These documents had never been in the legal possession of MERS and had never been legally transferred into the mortgage-backed security trusts by the original lender, Countrywide, so the New York court held that Bank of New York could not foreclose on the property.
This has implications in two directions. If the original mortgages and the promissory notes which they supported had not been timely transferred into the trusts, then the trusts held nothing of value and probably failed under NY law as legal trusts under the tax protection statutes.
Since New York law governs almost all the MB trusts, this has heavy significance. The investors who bought their certificates would have been deceived and defrauded. The banks who created these trusts and sold their certificates would be liable for their losses. The banks would also be potentially liable for the tax on all the profits from the mortgages which did pay off that were distributed to the securities owners because the trusts had violated the tax protection provisions setting up the original trusts, thus invalidating them as tax protected trusts.
Meanwhile, since MERS had not owned both the promissory note and the mortgage, they had illegal transferred the properties in their name to other entities without having the legal right to do so and, in many cases, had foreclosed on properties that they didn't have a right to foreclose on, thus subjecting the properties' title to later question from those who were illegally foreclosed upon. Many of the later investors who bought the foreclosed properties thus had not received good title to their purported properties because the foreclosures were questionable.
Many of the trust shares sold to investors thus contained valueless securities since they did not carry the right to foreclose on the delinquent mortgages to protect their investments as promised in the trust certificate agreements.
The use of MERS as a sleigh of hand to purportedly transfer the mortgages now potentially clouds the title of all the previously foreclosed properties, while at the same time potentially subjecting the banksters to massive fraud suits for selling the defective MBS trust certificates from the invalid trusts.
(The latter fraud is in addition to the fact that, even had the mortgages been legally conveyed to them, they contained mortgages which did not meet the credit requirements for solid mortgages as promised in the trust certificate agreements. In many cases, the banks knew that they were junk ab initio, while selling them as AAA or AA securities. Add to that the fact that MERS defrauded local counties of their recording fees).
The attorney general of New York and a few other states are now investigating the potential fraud committed by the biggest banks in the U.S. See
http://gramercyimages.com/... .
If found to be on a sufficiently massive scale, which appears to be the case, the MERS fraud could bring down the Big Banks as well as taint the land titles held by millions of home owners, reducing their value and possibly precluding them from selling their property in the future.
The financial capitalist banksters, who consider themselves so very, very clever as to warrant billions of dollars in yearly bonuses, may have shot themselves (and the entire banking industry and land tenure system) in the foot with a nuclear weapon, whose fall out could spew toxic radiation for generations. Minimally, let’s hope it will send some of these fraudsters to jail.
For more, see http://gramercyimages.com/blog1/tag/new-york-attorney-general-eric-schneiderman/
and
Fraud, Anyone? Another Type of Mortgage Document Fabrication Finally Getting Attention.
And see also Michael Powell and Gretchen Morgenson, “MERS? It May Have Swallowed Your Loan”. New York Times, March 5, 2011.March 5, 2011.