Kentucky files RICO Class Action Suit

[ltullos]

Is this the SHTF moment for mortgage foreclosures it seems?
http://market-ticker.org/akcs-www?post=168144

[ThePythonicCow]

Re: Kentucky files RICO Class Action Suit

Is this the SHTF moment for mortgage foreclosures it seems?
http://market-ticker.org/akcs-www?post=168144

There might not be any single SHTF moment for this stuff. This mortgage fraud bubble is like a fleet of mammoth battle ships with many weapons and massive armor. It's going to take a lot of hits to sink it.

But this sure looks like one sweet juicy hit!

[ThePythonicCow]

Re: Kentucky files RICO Class Action Suit

I like this description, from page 13 of the filing:

Defendant Merscorp, Inc., is a foreign corporation created in or about
1998 by conspirators from the largest banks in the United States in order to undermine
and eventually eviscerate long-standing principles of real property law,

It claims that the purpose of MERS was to undermine the rule of real property law in the U.S.

That just might be so.

[oddlots]

Re: Kentucky files RICO Class Action Suit

My first thought was, hey great someones going after KFC for the famous bowl.

Then my eyes focussed.

Brilliant. It might just unravel from here.

[don]

Re: Kentucky files RICO Class Action Suit

MSM on the practical implications for buyers and sellers of property ... at the dawn of RICO.


The law finally caught up with the home foreclosure mills. Some of the leading lenders and mortgage servicers — including Bank of America, JPMorgan Chase, and GMAC Home Mortgage, a unit of Ally Financial — have conceded that they’ve mistakenly filed for foreclosure based on faulty or even forged affidavits. At some mortgage service firms, an employee might robo-sign as many as 6,000 legal documents a week, making it impossible to verify the facts.

All of these borrowers are in default and most will almost certainly lose their homes. Some, however, might have been able to recover if the lender had offered to modify their loan. Their gripe, a fair one, is that lenders have been fatally unresponsive and in too big a hurry to evict. My MoneyWatch colleague, Ilyce Glink, says they’re in “loan mod hell.”

Various types of moratoriums are now in place in the 23 states that put foreclosures through the courts. Foreclosures in the other states are less affected, because borrowers can’t bring a challenge to a judge. Even so, title insurers are taking more time to examine documents, which can drag the process out.

What does this mean to people buying and selling homes? Plenty.

It will take even longer for the real estate market to recover. The record inventory of homes in foreclosure hangs over the housing market like a sword, says Guy Cecala, CEO and publisher of Inside Mortgage Finance Publications. Until it’s cleared, sales and prices won’t return to a healthy track. The paperwork errors might delay foreclosures for just two or three additional months, if the lenders merely have to clean up their act, Cecala says. But if massive legal challenges develop, the housing depression could drag on for several years more.

Owners who haven’t been paying their mortgage might have many more months to stay in their homes before they’re forced out. Already, it’s taking an average of 478 days before foreclosure begins, according to LPL Applied Analytics, because the system is so clogged. People who fight eviction might last even longer. They’re unlikely to recover their homes, however, even if a court agrees that the documentation was bad. Once borrowers get more than six months behind on payments, they rarely catch up, Cecala says. As a practical matter, they use those extra, non-paying months to put their finances back in order. (Foreclosures usually move faster in states where they don’t go through the courts.)

Owners who think that fighting foreclosure will bring lenders to the bargaining table are probably mistaken. They’re hoping for a cut in the interest rate and in the amount of the loan. But two-thirds of the loans outstanding are bundled into mortgage securities and they’re governed by contract, Cecala says. Investors rarely agree to take less than they’re owed. The servicers will merely correct their paperwork and file for foreclosure again. In egregious cases, courts might order the lenders to pay the borrower’s court costs.

Buyers should always take title insurance. A title search will pick up errors before you sign the check and protect you if something was overlooked. In the unlikely event that a former owner returns to challenge the foreclosure, the insurance company will defend you. If there’s a problem, the insurer will fix it or cover your loss, says Michael Waiwood, CEO of EnTitle Insurance. All of this is highly hypothetical. People who lose their homes usually move on. They couldn’t afford their mortgage before, and almost certainly won’t be able to catch up on that old loan.

If you’re in the process of buying a foreclosed home, the transaction might take longer than you’d hoped. Title insurers are looking more carefully at the properties they accept. Old Republic National Title, for example, reportedly told its agents that, for now, it won’t write policies on homes foreclosed by GMAC and JPMorgan Chase. Old Republic declined comment. Other insurers are still covering these properties, but with caution. The industry hasn’t reached a consensus on how to proceed, Waiwood says.

If you’re buying a pre-foreclosure, get title insurance before you sign. These homes have been scheduled for foreclosure but the owners are still living there. If they have some equity in the property, they’ll be eager to sell at a bargain price that nets them at least some money beyond what they owe the bank. If they’re underwater, they’re looking for a short sale, where the bank agrees to accept less than it’s owed. As long as you get title insurance, your purchase is safe.

If you’re buying at a foreclosure auction, you run more than the usual risk. This is the land where specialists roam. Search the title yourself, says John Reed, Author of How to Increase the Value of Real Estate. Do it on the afternoon before the sale, to catch as many last-minute liens as possible. You can’t get title insurance until after you buy the property, so you’re running the risk that an insurer might have doubts.

Sloppy documentation isn’t just an artifact of the recent real estate frenzy. When I bought an apartment in 2004, my lawyer discovered an error in the chain of title. I went through with the transaction but put a substantial part of the purchase price into escrow, not to be released until the problem was fixed. That gave the person who sold the apartment a major incentive to clean up the paperwork, which he did in about six months.

For investors, a bad title could be a buying opportunity. The documentation problem is invariably solved, Reed says. You might be able to pick up the property at a bargain price, rent it out, and realize a profit when the title is eventually cured. In real estate, there’s no mistake that doesn’t do somebody good.

http://moneywatch.bnet.com/investing...ng-market/511/

[don]

Re: Kentucky files RICO Class Action Suit

Kentucky rain keeps pouring down,
And up a'head's another town that I'll go walking through
With the rain in my shoes, searchin' for you
In the cold Kentucky rain, in the cold Kentucky rain.

Tuesday, October 5, 2010

Multi-Billion-Dollar Class Action Suits Filed Against Lender Processing Services for Illegal Fee Sharing, Document Fabrication; Prommis Solutions Also Targeted

Welcome to our new readers from the FCIC.
Lender Processing Services, a crucial player in the residential mortgage servicing arena, has been hit with two suits seeking national class action status (see here and here for the court filings). If the plaintiffs prevail, the disgorgement of fees by LPS could easily run into the billions of dollars (we have received a more precise estimate from plaintiffs’ counsel). To give a sense of proportion, LPS’s 2009 revenues were $2.4 billion and its net income that year was $276 million.

These suits, one of which was filed late last week, the other Monday, appear to be the proximate cause for the sharp drop in LPS stock, which fell 5% on Friday and 8% Monday (trading was halted just prior to the close of the trading day).

Those close to the foreclosure process have lodged many complaints against LPS. But the two suits we highlight here level the most serious and wideranging allegations thus far.

By way of background, we’ve described issues with foreclosure mills and the flaws in the securitization process at some length in previous posts (see here and here for some recent posts which contain overview material). As evidence about problems with the foreclosure process have surfaced at more and more servicers, one of the common themes has been that a substantial portion of the foreclosure process was outsourced to various processing companies. Foreclosure defense attorneys have cited one firm, called Lender Processing Service (LPS) as one of the largest as well as more problematic firms in the outsourced foreclosure business. In addition, by 2008, LPS had purchased a company called DocX, the company responsible for the “document production” price sheet cited here earlier.

LPS is effectively in three lines of business (which are organized in two divisions): Technology, Data, and Analytics; Loan Services, and Default Services. The suits focus on the practices of the Default Services operation, which contributed $1.137 billion, or 48% of total revenues. The allegations set forth in the suits involve its Default Services, which organizes and manages foreclosures (including property management and REO auctions) on behalf of servicers.

But the rub in this line of business is that the servicers are technically not the clients. LPS acts a sort of general contractor, farming out various tasks to both internal staff as well as outside firms. But LPS’s business pitch to the servicing industry was that it would come in and use a technology platform and provide (if desired) a turnkey solution, FOR NO ADDITIONAL COST than what the servicers were already paying on foreclosures.

How could that be? All of LPS’s revenues in Default Services come from the lawyers in the national network of foreclosure mills that LPS has developed over time. Note that these cases may be filed in state court or federal bankruptcy court, depending on the situation of the borrower. In a routine foreclosure, all legal actions will be filed in state court. If the borrower has filed for a Chapter 13 bankruptcy, the Federal bankruptcy court has jurisdiction. In theory, the bankruptcy filing stops the actions of all creditors until the borrower has worked out a payment plan with the court. But in these cases, LPS and its network firms are seeking to break the bankruptcy court time out and grab the borrower’s house (the legal procedure is “motion for relief of stay”).

To illustrate the degree of control LPS exercises over its network: we have been told by an LPS insider that the software that LPS uses to coordinate with all law firms in its network, LPS Desktop, incorporates a scoring system called 3/3/30. When LPS sends a referral on a foreclosure, the referee is expected to respond in three minutes. When it accepts the referral, it is auto debited (ACH or credit card). In three days, it is expected to have filed the first motion required in pursing the case, and it is expected to have resolved the case in 30 days. Firms are graded according to their ability to meet these time parameters in a green/yellow/red system. Firms that get a red grade are given a certain amount of time to improve their results or they are kicked out of the network.

The cases describe the many fees between LPS and the network law firms. The terms of standard agreements provide for the payment of $150 at the time of referral (the first 3 in the 3/3/30 standard above). Network firms allegedly pay other fees as various milestones are reached, and these are couched as fees for technology, administrative review, document execution, and other legitimate-sounding services. We’ve also been told separately by LPS insiders that LPS and network law firms split the fee for the motion for relief of stay in bankruptcy court, as well as the fee on a small filing called a proof of claim.

What, pray tell, is wrong with this business model? The two suits attack LPS’s very foundations. One case was filed late last week in Federal bankruptcy court in Mississippi and the other in state court in Kentucky. Both make similar allegations, but the Federal case is broader in some respects (it includes a company called Prommis Solutions a firm backed by Great Hill Partners, that like LPS, provides services to foreclosure mills, including one named in this case as defendant along with LPS).

The Kentucky case includes on the RMBS trust issue that we have discussed in this blog. First, it contends that the mortgage assignment attempted by the the local law firm to allow the trust foreclose was a void under New York law, which governs the trust. Hence the foreclosure was invalid. Second, it claims that the defendants (the local law firm and LPS) fabricated documents. Third, the plaintiffs claim that the defendants (LPS and the local law firm) conspired together to practice systemic fraud upon the court and engage fee sharing arrangements, which is tantamount to the unauthorized practice of law (It is illegal for a law firm to split fees with a non-lawyer or to pay a non-lawyer for a referral; it’s considered to be the unauthorized practice of law). And this leads to some very serious conclusions. Per the Kentucky case:

This attempt by the Trust to take Stacy’s real property is most analogous to stealing since this Trust cannot provide any legal evidence of ownership of the promissory note in accordance with the requirements of New York law which governs and controls the actions of the Trust and the Trustee acting on behalf of the trust.

But the real meat in these cases are the class action claims, and they are real doozies. Both allege undisclosed contractual arrangements for impermissible legal fee splittings, which are camouflaged as various types of fees we described earlier. The suits describe the considerable lengths that LPS has gone to to keep these illegal kickbacks secret, including requiring that all attorneys who join the network keep the arrangement confidential. as well as using dubious “trade secret” claims to forestall their disclosure in discovery.

As bad as this fact pattern is, it has even more serious implications for the bankruptcy court filing in Mississippi. In a bankruptcy case, any attorney pleading before the court must disclose every disbursement pursuant to a case, no matter how minor. Yet the payment of fees to LPS have never been disclosed to a single bankruptcy judge in the US, since LPS requires they be kept confidential. LPS and its network lawyers are thus engaged in a massive, ongoing fraud on all bankruptcy courts in the US.

The Prommis Solutions/Great Hill charges are included only in the Mississippi case. Prommis is broadly in the same business as LPS’s Default Services unit (”leading provider of technology-enabled processing services for the default resolution sector of the residential mortgage industry”). And Prommis and its investor Great HIll, like LPS, are not a law firms, which means their participation in foreclosure-related legal fees constitutes illegal fee sharing. Prommis filed a registration statement (it planned to go public) this past June. Consider this section from its “Risk Factors” discussion (boldface theirs):

Regulation of the legal profession may constrain the operations of our business, and could impair our ability to provide services to our customers and adversely affect our revenue and results of operations.

Each state has adopted laws, regulations and codes of ethics that grant attorneys licensed by the state the exclusive right to practice law. The practice of law other than by a licensed attorney is referred to as the unauthorized practice of law. What constitutes or defines the boundaries of the “practice of law,” however, is not necessarily clearly established, varies from state to state and depends on authorities such as state law, bar associations, ethics committees and constitutional law formulated by the U.S. Supreme Court. Many states define the practice of law to include the giving of advice and opinions regarding another person’s legal rights, the preparation of legal documents or the preparation of court documents for another person. In addition, all states and the American Bar Association prohibit attorneys from sharing fees for legal services with non-attorneys.

The common remedy for illegal fee sharing is disgorgement. Remember the magnitude of this business: it accounts for nearly half of LPS’s revenues. LPS is a pretty levered operation, with a debt to equity ratio of over 3:1. It isn’t hard to see that success in either of these cases would be a fatal blow to LPS. Similarly, if the allegations are proven true it could have ramifications for all servicers who do business with Fannie and Freddie since they are not supposed to be involved in referring work to a vendor who pays a kickback for a referral.

http://www.nakedcapitalism.com/2010/...-targeted.html

[GRG55]

Re: Kentucky files RICO Class Action Suit

MSM on the practical implications for buyers and sellers of property ... at the dawn of RICO.


The law finally caught up with the home foreclosure mills. Some of the leading lenders and mortgage servicers — including Bank of America, JPMorgan Chase, and GMAC Home Mortgage, a unit of Ally Financial — have conceded that they’ve mistakenly filed for foreclosure based on faulty or even forged affidavits...

I only have one question. If the ownership of the debt instrument is in doubt, then what is the real value of the MBS that these lenders are still carrying on their books at par?

It would seem that the extend and pretend strategy, with official relief from sound accounting standards, may have run its course, and these banks are going to have to take more writedowns on the non-perrforming paper...

[don]

Re: Kentucky files RICO Class Action Suit

I only have one question. If the ownership of the debt instrument is in doubt, then what is the real value of the MBS that these lenders are still carrying on their books at par?

It would seem that the extend and pretend strategy, with official relief from sound accounting standards, may have run its course, and these banks are going to have to take more writedowns on the non-perrforming paper...

Buckle up, we're about to see another demonstration of the power of the oligarchy. Has it waned? Why would it?

[bpr]

Re: Kentucky files RICO Class Action Suit

Buckle up, we're about to see another demonstration of the power of the oligarchy. Has it waned? Why would it?

Yep. This is only a civil suit. Would be a whole different story if it were DOJ or the Kentucky AG pursuing criminal claims.

[dbarberic]

Re: Kentucky files RICO Class Action Suit

Thanks for finding this. I read about the suit on Jim Sinclair's website, but have not found a link to any other news articles discussing it. Funny how this news has not made it to MSM.

[dbarberic]

Re: Kentucky files RICO Class Action Suit

Yep. This is only a civil suit. Would be a whole different story if it were DOJ or the Kentucky AG pursuing criminal claims.

It is possible that the amount of fraud uncovered by the civil suit is so overwhelming and becomes so well known that it forces the hand of the DOJ or Kentucky AG to file charges.

[dbarberic]

Re: Kentucky files RICO Class Action Suit

It looks like a legislative fix is already underway:

http://4closurefraud.org/2010/10/05/...rizations-act/

On Monday, September 27, 2010, U.S. Senator Bob Casey (D-PA), on the Senate floor, asked that the Judiciary Committee be discharged from further consideration of a bill that would hurt consumers. H.R. 3808 requires federal and state courts to recognize notarized documents from other states, including ones that contain electronic notarizations that are not subject to the same consumer safeguards of documents notarized in person. Some financial institutions are using electronic notarizations to process home foreclosure documents.

Sen. Casey asked that the Senate move forward with immediate consideration of the bill with unanimous consent that the bill pass with no other action or debate. The Senate passed the bill without amendment by unanimous consent. It now sits on the President’s desk. I’m asking you to email or call the President at 202-456-1111 to ask him not to sign the bill.

H.R. 3808 is known as the “Interstate Recognition of Notarizations Act.” It passed the House under a suspension of the rules in April 2010. It requires federal and state courts to recognize any notarization that is lawful in the state where the notary is licensed. Now, in one day, it passed in the Senate.

When I learned of it last Thursday, it sounded innocuous to me, but then I started looking at the timing of the bill. GMAC, owned by Ally, had just suspended its foreclosure actions in 23 states, including Ohio. I had already referred Chase Home Finance, LLC, on August 23, 2010, to the U.S. Department of Justice, asking it to review and investigate Chase’s document notarization practices in home foreclosures (18,000 documents per month were being notarized by 8 people, along with other irregularities). I license notaries in the State of Ohio. Even though I don’t have the power under state law to investigate or prosecute, I couldn’t stand idly by without acting. That’s why I’m asking you to email or call the President at 202-456-1111 to ask him not to sign the bill.

Last Wednesday, the day before I announced the DOJ referral, JPMorgan Chase announced it was having third party counsel review its document procedures for foreclosures. Just two days before, the U.S. Senate had rushed through H.R. 3808. Something didn’t seem right. Since then others agree with me.

Notarizing a document requires the signer to make a fundamental statement, an acknowledgment, before a notary public. It is used for documents of great sensitivity or value, like when the title of a car is transferred on its sale or when a bank tells a court how much is owed on a note for a mortgage when it wants to foreclose.

Some states have adopted “electronic notarization” laws that ignore the requirement of a signer’s personal appearance before a notary. A notary’s signature is that of a trusted, impartial third party, whose notarization bolsters the integrity of the document. Many of these policies for electronic notarization are driven by technology rather than by principle, and they are dangerous to consumers.

President Obama was presented with HR. 3808 on Thursday, September 30, 2010. As of today, he has not signed the bill. Please join me in urging him not to sign the bill by sending an email or calling the White House at 202-456-1111.

Mortgages are now being used as backing for securities traded all over the world by financial institutions. When a mortgage goes into default, a “chain of title” (list of its owners) must be created. It’s being discovered that many financial institutions have taken shortcuts in creating lawful chains of title that allow them to foreclose and take homes when they would not otherwise have the right under the law.

Banks demand we follow every letter of their contracts We must demand they follow the law. It’s that simple. Please join me in urging President Obama not to sign the bill by sending an email or calling 202-456-1111.

Thanks for working together,

Jennifer Brunner
Ohio Secretary of State

[don]

Re: Kentucky files RICO Class Action Suit

Now, in one day, it passed in the Senate.

SECTOR | # OF MEMBERS
Finance, insurance, and real estate 57
Lawyers and lobbyists 25
Health 5
Agribusiness 3
Labor 2
Energy and natural resources 2
Miscellaneous business 2
Communications and electronics 1
No money raised 3
Total seats | 100

(from the iTulip post "Who Owns Congress?)

[Rajiv]

Re: Kentucky files RICO Class Action Suit

From Ellen Brown - FORECLOSUREGATE AND OBAMA'S 'POCKET VETO'

Amid a snowballing foreclosure fraud crisis, President Obama today blocked legislation that critics say could have made it more difficult for homeowners to challenge foreclosure proceedings against them.

The bill, titled The Interstate Recognition of Notarizations Act of 2009, passed the Senate with unanimous consent and with no scrutiny by the DC media. In a maneuver known as a "pocket veto," President Obama indirectly vetoed the legislation by declining to sign the bill passed by Congress while legislators are on recess.

The swift passage and the President's subsequent veto of this bill come on the heels of an announcement that Wall Street banks are voluntarily suspending foreclosure proceedings in 23 states.

By most reports, it would appear that the voluntary suspension of foreclosures is underway to review simple, careless procedural errors. Errors which the conscientious banks are hastening to correct. Even Gretchen Morgenson in the New York Times characterizes the problem as “flawed paperwork.”

But those errors go far deeper than mere sloppiness. They are concealing a massive fraud.

They cannot be corrected with legitimate paperwork, and that was the reason the servicers had to hire “foreclosure mills” to fabricate the documents.

These errors involve perjury and forgery -- fabricating documents that never existed and swearing to the accuracy of facts not known.

Karl Denninger at MarketTicker is calling it “Foreclosuregate.”

Diana Ollick of CNBC calls it “the RoboSigning Scandal.” On Monday, Ollick reported rumors that the government is planning a 90-day foreclosure moratorium to deal with the problem.

Three large mortgage issuers – JPMorgan Chase, Bank of America and GMAC -- have voluntarily suspended thousands of foreclosures, and a number of calls have been made for investigations.

Ohio Attorney General Richard Cordray announced on Wednesday that he is filing suit against Ally Financial and GMAC for civil penalties up to $25,000 per violation for fraud in hundreds of foreclosure suits.

These problems cannot be swept under the rug as mere technicalities. They go to the heart of the securitization process itself. The snowball has just started to roll.

You Can’t Recover What Doesn’t Exist

Yves Smith of Naked Capitalism has uncovered a price list from a company called DocX that specializes in “document recovery solutions.” DocX is the technology platform used by Lender Processing Services to manage a national network of foreclosure mills. The price list includes such things as “Create Missing Intervening Assignment,” $35; “Cure Defective Assignment,” $12.95; “Recreate Entire Collateral File,” $95. Notes Smith:

[C]reating . . . means fabricating documents out of whole cloth, and look at the extent of the offerings. The collateral file is ALL the documents the trustee (or the custodian as an agent of the trustee) needs to have pursuant to its obligations under the pooling and servicing agreement on behalf of the mortgage backed security holder. This means most importantly the original of the note (the borrower IOU), copies of the mortgage (the lien on the property), the securitization agreement, and title insurance.

How do you recreate the original note if you don’t have it? And all for a flat fee, regardless of the particular facts or the supposed difficulty of digging them up.

All of the mortgages in question were “securitized” – turned into Mortgage Backed Securities (MBS) and sold off to investors. MBS are typically pooled through a type of “special purpose vehicle” called a Real Estate Mortgage Investment Conduit or “REMIC”, which has strict requirements defined under the U.S. Internal Revenue Code (the Tax Reform Act of 1986). The REMIC holds the mortgages in trust and issues securities representing an undivided interest in them.

Denninger explains that mortgages are pooled into REMIC Trusts as a tax avoidance measure, and that to qualify, the properties must be properly conveyed to the trustee of the REMIC in the year the MBS is set up, with all the paperwork necessary to show a complete chain of title. For some reason, however, that was not done; and there is no legitimate way to create those conveyances now, because the time limit allowed under the Tax Code has passed.

The question is, why weren’t they done properly in the first place? Was it just haste and sloppiness as alleged? Or was there some reason that these mortgages could NOT be assigned when the MBS were formed?

Denninger argues that it would not have been difficult to do it right from the beginning. His theory is that documents were “lost” to avoid an audit, which would have revealed to investors that they had been sold a bill of goods -- a package of toxic subprime loans very prone to default.

The Tranche Problem

Here is another possible explanation, constructed from an illuminating CNBC clip dated June 29, 2007. In it, Steve Liesman describes how Wall Street turned bundles of subprime mortgages into triple-A investments, using the device called “tranches.” It’s easier to follow if you watch the clip (here), but this is an excerpt:

How do you create a subprime derivative? . . . You take a bunch of mortgages . . . and put them into one big thing. We call it a Mortgage Backed Security. Say it’s $50 million worth. . . . Now you take a bunch of these Mortgage Backed Securities and you put them into one very big thing. . . . The one thing about all these guys here [in the one very big thing] is that they’re all subprime borrowers, their credit is bad or there’s something about them that doesn’t make it prime. . . .

Watch, we’re going to make some triple A paper out of this. . . Now we have a $1 billion vehicle here. We’re going to slice it up into five different pieces. Call them tranches. . . . The key is, they’re not divided by “Jane’s is here” and “Joe’s is here.” Jane is actually in all five pieces here. Because what we’re doing is, the BBB tranche, they’re going to take the first losses for whoever is in the pool, all the way up to about 8% of the losses. What we’re saying is, you’ve got losses in the thing, I’m going to take them and in return you’re going to pay me a relatively high interest rate. . . . All the way up to triple A, where 24% of the losses are below that. Twenty-four percent have to go bad before they see any losses. Here’s the magic as far as Wall Street’s concerned. We have taken subprime paper and created GE quality paper out of it. We have a triple A tranche here.

The top tranche is triple A because it includes the mortgages that did NOT default; but no one could know which those were until the defaults occurred, when the defaulting mortgages got assigned to the lower tranches and foreclosure went forward. That could explain why the mortgages could not be assigned to the proper group of investors immediately: the homes only fell into their designated tranches when they went into default. The clever designers of these vehicles tried to have it both ways by conveying the properties to an electronic dummy conduit called MERS (an acronym for Mortgage Electronic Registration Systems), which would hold them in the meantime. MERS would then assign them to the proper tranche as the defaults occurred. But the rating agencies required that the conduit be “bankruptcy remote,” which meant it could hold title to nothing; and courts have started to take notice of this defect. They are concluding that if MERS owns nothing, it can assign nothing, and the chain of title has been irretrievably broken. As foreclosure expert Neil Garfield traces these developments:

First they said it was MERS who was the lender. That clearly didn’t work because MERS lent nothing, collected nothing and never had anything to do with the cash involved in the transaction. Then they started with the servicers who essentially met with the same problem. Then they got cute and produced either the actual note, a copy of the note or a forged note, or an assignment or a fabricated assignment from a party who at best had dubious rights to ownership of the loan to another party who had equally dubious rights, neither of whom parted with any cash to fund either the loan or the transfer of the obligation. . . . Now the pretender lenders have come up with the idea that the “Trust” is the owner of the loan . . . even though it is just a nominee (just like MERS) . . . . They can’t have it both ways.

My answer is really simple. The lender/creditor is the one who advanced cash to the borrower. . . . The use of nominees or straw men doesn’t mean they can be considered principals in the transaction any more than your depository bank is a principal to a transaction in which you buy and pay for something with a check.

So What’s to Be Done?

Garfield’s proposed solution is for the borrowers to track down the real lenders -- the investors. He says:

[I] f you meet your Lender (investor), you can restructure the loan yourselves and then jointly go after the pretender lenders for all the money they received and didn’t disclose as “agent.”

Karl Denninger concurs. He writes:

Those who bought MBS from institutions that improperly securitized this paper can and should sue the securitizers to well beyond the orbit of Mars. . . . [I]f this bankrupts one or more large banking institutions, so be it. We now have "resolution authority", let's see it used.

The resolution authority Denninger is referring to is in the new Banking Reform Bill, which gives federal regulators the power and responsibility to break up big banks when they pose a “grave risk” to the financial system – which is what we have here. CNBC’s Larry Kudlow calls it “the housing equivalent of the credit financial meltdown,” something he says could “go on forever.”

Financial analyst Marshall Auerback suggests calling a bank holiday. He writes:

Most major banks are insolvent and cannot (and should not) be saved. The best approach is something like a banking holiday for the largest 19 banks and shadow banks in which institutions are closed for a relatively brief period. Supervisors move in to assess problems. It is essential that all big banks be examined during the “holiday” to uncover claims on one another. It is highly likely that supervisors will find that several trillions of dollars of bad assets will turn out to be claims big financial institutions have on one another (that is exactly what was found when AIG was examined—which is why the government bail-out of AIG led to side payments to the big banks and shadow banks). . . . By taking over and resolving the biggest 19 banks and netting claims, the collateral damage in the form of losses for other banks and shadow banks will be relatively small.

What we need to avoid at all costs is “TARP II” – another bank bailout by the taxpayers. No bank is too big to fail. The giant banks can be broken up and replaced with a network of publicly-owned banks and community banks, which could do a substantially better job of serving consumers and businesses than Wall Street is doing now.

[dbarberic]

Re: Kentucky files RICO Class Action Suit

From Ellen Brown - FORECLOSUREGATE AND OBAMA'S 'POCKET VETO'

I wonder if this is simply a mid-term election stunt and after elections this will get quietly passed; or if it will really stick and the banks are going to SOL.