Just a few years ago, representing homeowners at risk of foreclosure was a tiny niche in the practice of law, and when I say "tiny," I mean tiny as to be practically nonexistent. Sure, there were a few lawyers out there, primarily in the judicial foreclosure states, handling this sort of legal matter, but it certainly wasn't the only legal services they offered… there just weren't enough clients in need to keep lights on at a law office. Well, what a difference a couple of years makes. Today, foreclosure defense has got to be one of the fastest growing areas in the practice of law, but as those that entered the field a few years ago all readily attest, there's nothing simple or easy about it. For one thing, the legal transfer of property rights, thanks to the Wall Street bankers and the advent of securitization, is about as complex a subject as one might imagine. For another, it's an extremely fluid area of the law, with the cases being filed, the outcome of depositions, the impact of legislation and federal investigations, and decisions by the various courts all combining to keep the landscape in flux as if some sort of primordial pool. Finding clients is the only aspect of the practice that is not a problem, as a matter of fact it's pretty much raining homeowners in need, but getting paid by those clients is another matter. By definition, someone who is at risk of foreclosure is struggling financially, and having to litigate against the largest banks in the world on a brown-bag-budget can be a lot like performing a high wire act, sans net and balance bar, while on crutches. Not only do few of the applicable statutes provide for a private right of action, but even fewer allow the winner to receive attorneys' fees from the loser. Obviously, that's no accident; will the banking lobby please take a bow. Over the last three years, as I've written hundreds of articles on various aspects the financial and foreclosure crises, I've had to rely on the expertise of a large number of legal professionals from all over the country, and with the exception of those receiving salaries as legal aid attorneys, all quite obviously struggle to make ends meet to some degree. Those that make foreclosure defense their primary focus (and making it your primary focus is likely the only way to do it successfully), do what they do either out of passion for helping those in need, or for the challenge of fighting for the underdog against the evil empire… or some combination of the two. Those that get into it for the money quickly find that they're working 80-100 hour weeks and there's not enough money in the world to put in that kind of effort if no other psychic benefit is accruing. Perhaps the most difficult aspect of operating a law practice focused on foreclosure defense is that today's courts, often clogged with litigation brought by pro se litigants, are anything but consistent in how they rule on the various matters of law involved. Nationally known foreclosure defense attorney Nick Wooten explains… "It's a unique situation because the rule of law arguments are being brought in the context of someone who is not paying their bills, and the law generally does not favor such individuals." I recently referred to the phenomena as the "but you didn't make your payment exemption to the law." It occurs when judges become wholly uninterested in the matters of law, refusing to look past the obvious… that the homeowner is delinquent as far as his or her mortgage payments are concerned… so, homeowner loses and case closed. To-date, that is what's occurred many more times than it hasn't, but certainly since the robo-signing of documents was brought to light in the fall of 2010, the courts have changed to some degree… well, at least some of them have… some of the time. MERS and the Owner of the Note… The variances that exist in decisions by the courts are most readily found in two areas. One involves the Mortgage Electronic Registration Service, or as we've all come to know it… MERS, and the other centers around the question of whether the trust, on whose behalf the servicer is seeking to foreclose, does in fact own the note. Funded by the mortgage banking industry along with the GSEs, Fannie and Freddie, MERS is a company with few employees established to allow mortgages to be registered centrally without recording at county recording offices, as had always been required. The use of MERS was not well researched by the mortgage banking industry and it has brought the chain of title into question, with some saying the result is an irrevocable cloud on millions of titles across the country. Until MERS entered the picture, you could find out who owned a given property going back to the beginning of this country's existence. Not anymore… not since MERS. As to the question of whether the trust actually owns the note, the answer is never simple, but at this point, it's clear that in many instances the answer is no. The type of trust used in conjunction with mortgage-backed securities is called a REMIC trust… it's an acronym that stands for Real Estate Mortgage Investment Conduit… and there are strict rules imposed by both the Internal Revenue Code and the Pooling and Servicing Agreements that govern the transfer of loans into such trusts. Unquestionably, in many instances, many of these rules were not followed. Depending on the state you're in, or even the type of court you're in, the judge's decision seems just as likely to say MERS is perfectly acceptable as not, and while some judges care about the foreclosing party having standing, or in other words being able to prove the trust does owns the note in question, others are quite blunt in saying that they could care less. In California, for example, in the appellate court's decision in Gomes v. Countrywide, the court rejected the plaintiff's attempt to challenge his non-judicial foreclosure, emphasizing that "under California law MERS may initiate a foreclosure as the nominee, or agent, of the note holder." See: Gomes v. Countrywide Home Loans, Inc., No. D057005, 2011 WL 566737 (Cal. Ct. App. 4th Dist. Feb. 18, 2011). Basically, the high court said that the holder of the Deed of Trust can foreclose, who owns the actual note is essentially irrelevant, and further that assignment by MERS is just fine, absent allegations of fraud… I think that's most of it anyway… it's a very technical decision so don't go basing your plans on what I've said about it… check with a lawyer, and maybe even two before doing anything. Bankruptcy courts in California, on the other hand, at times have been far more critical of MERS, the need to record the assignment of the Deed of Trust, and even proving ownership of the note. No far-reaching precedents exist as yet, and all of the lawyers I asked told me that the outcome depends on which judge hears the case… not all that reassuring, I would agree. In other states, and most recently Nevada, Massachusetts, and New York immediately come to mind, MERS has not been not doing well at all. Several judges in those states have recently written scathing opinions of MERS… perhaps most memorable was U.S. Bankruptcy Judge Robert E. Grossman out of New York, who wrote: "MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process. This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law." I covered the decision at the time under the headline, "New Bankruptcy Court Decision Sounds the Alarm… The U.S.S. MERS is Going Down." (I even included new lyrics to the "Good Ship Titanic" song we all learned as kids.) As consumer super-attorney Max Gardner, referring to Judge Grossman's decision, said: "This case may well be the final dagger in the deep dark heart of the MERS business model. Maine foreclosure defense attorney Tom Cox, the lawyer who uncovered the robo-signing at GMAC during a deposition last fall, had the following to say about Judge Grossman's decision: "He (Judge Grossman) does the most thorough and competent analysis of the MERS charade that I have seen, basically concluding that the entire MERS business model does not comply with our laws, and that he will no longer accept MERS mortgage assignments in his court room." "It's a decision that was a delight to see." But… not so fast, because look back just a couple of months and it's easy to find cases where judges ruled in favor of MERS. For example, in the case of In re: Lopez, No. 09-10346, 2011 WL 576820 (Bankr. D. Mass. Feb. 9, 2011), Judge William C. Hillman upheld the validity of MERS serving as "nominee" when he granted a servicer's motion for relief from stay in a Chapter 13 bankruptcy proceeding. Judge Hillman said that "the Mortgage specifically identified MERS as the mortgagee under the instrument and granted it and its 'successors and assigns' a power of sale." Judge Hillman went on to uphold MERS' assignment of the mortgage as "nominee," saying…"though MERS never held the Note, it could, by virtue of its nominee status, transfer the Mortgage on behalf of the note holder." Similarly, In the recent case of In re: Martinez, No. 10-7027, 2011WL 489905 (Bankr. D. Kan. Feb. 11, 2011), Judge Janice Miller Karlin granted motions for summary judgment filed by MERS and the originator, Countrywide Home Loans, Inc., rejecting claims out of hand that challenged MERS' business model. In this case, the plaintiffs said that because they owed the debt to the originator (who also still held the promissory note), and not to MERS, no one was allowed to enforce the mortgage that plaintiffs executed to MERS. Judge Karlin, however, held that MERS was properly acting as Countrywide's agent. Relying on language found in the mortgage instrument, MERS' Terms and Conditions, and state agency law, Judge Karlin held: Based upon this evidence, the Court concludes that MERS was clearly acting as an agent for Countrywide at all relevant times. MERS held the Mortgage as "nominee" for Countrywide, and agreed to act on Countrywide's behalf and at Countrywide's direction with respect to the Mortgage. The fact that MERS and Countrywide chose to use the word "nominee," rather than "agent," does not alter the underlying relationship between the two parties. There is no requirement that parties to an agency relationship specifically refer to the agent by the name "agent." So, for me at least… MERS has become a lot like eggs for breakfast. At first eggs were good for me, but then they were bad for me… and then they were good for me again… and now I have no idea what the deal is with eating eggs for breakfast… so I eat oatmeal. Abigail Field, who writes about the financial and foreclosure crises for Daily Finance and Fortune Magazine, and with whom I have only just recently become acquainted, I'm embarrassed to say, has an excellent piece titled: "The Meaning of MERS," in which, after covering the issues from A-to-Z, she makes a darn fine case for legislating MERS out of existence. I highly recommend reading it specifically, and her in general. Her blog is "Reality Check," and I'm about to link to it as one of my favorites. The bottom-line is that over the last couple of years, hardly a month has passed without another decision that either somehow further emboldens homeowners or threatens to cause despair en masse. Overall, I would have to say that this past year, more homeowners have won out in key areas than have banks, and certainly the robo-signing scandal hasn't helped the banks' case in the court of public opinion, but other than sporadic wins in certain pockets, most if not all states still lack anything definitive on these issues. The good news is that more and more Americans are coming to realize that what's happened economically in this country has not been the fault of irresponsible homeowners, and that's certainly good news. But with foreclosure laws largely being state laws, it looks like it could be a while before we see any consistency among the various courts of potential jurisdiction, much less across state lines. I tried it before and it didn't work… I talk to foreclosure defense attorneys from all over the country just about every single day, so I have a fairly large picture window into what's going on around the country, and I've started to notice something taking hold among some attorneys… NOT ALL, by any means, but some. It appears to me that it's some sort of fatigue, and it's often embodied in the phrase: I tried it before, and it didn't work. It seems that, having spent the last couple of years getting beat up by judges who at the beginning of the foreclosure crisis only wanted to hear three words before deciding the case: Borrower is delinquent… some lawyers are exhibiting signs of battle fatigue. Battle fatigue is a very real medical condition, the United States Army recognizes it as such, and its manuals state that even moderate cases are "too much of a burden to remain with their unit." I looked up the symptoms in the Army's field manual and several seem like they might apply here: 1. Hyper-alertness – No question about this one… after handling a few dozen homeowners, many lawyers become hyper-something for sure. 2. Irritability – This one's hard to tell… they're always nice to me, but then they are lawyers so under the right circumstances they become irritable… but is that a symptom of fatigue or just part of the personality that wants to become a lawyer in the first place? Not sure, too big a question… let's move on… 3. Inertia, indecision and tiredness – Some of these lawyers have become poster children for inertia, indecision and tiredness… and who could blame them. Theirs is not an easy job and it's easy to see how eventually it would become hard to know exactly which way to turn. Of course, I struggle with these symptoms as well, and I'm not a lawyer. I think it's because this battle on behalf of homeowners has already been long and hard, and for whatever reason, maybe because it changes so quickly, it takes over your entire life if your not careful. I mean, just blogging about it will kill you, as evidenced by the fact that the only exercise I've gotten over the last couple of years has been jumping to conclusions and side-stepping authority. 4. Inability to Concentrate – Weren't we just talking about a chicken? 5. Insomnia and Terror Dreams – I don't know about the lawyers, but I routinely post articles at 4:00 am, only to find that Yves Smith over at Naked Capitalism just posted at 3:30 am. And as to Terror Dreams, I had a dream recently that my Option Arm exploded… no, I mean literally exploded and took out an entire city block like a nuclear bomb. 6. Depression – Lawyers… depressed? After hearing 100 judges in a row tell you the only security they care about involves an alarm system, and that the only note they're interested in hearing is a B flat… I suppose it could get a little depressing, sure… why not? 7. Anxiety – Ya' think? You ever seen a dog that someone hit with a rolled up newspaper one too many times. I mean, look at a few of the state Attorneys General. Like the month of March, they came to their investigation of the mortgage servicers like lions and they're going out like lambs. Today, there's a few AGs that look like they'd agree to settle with the banks in exchange for a toaster oven and free checking. 8. Memory Loss – I may have noticed this, I just don't recall. (I know, I know… but I couldn't help it.) 9. Tension – Hard to assess tension in some lawyers without removing the yardstick from their posterior, if you know what I mean. A good friend of mine that happens to be a lawyer actually minored in Tension as an undergrad. Okay, so enough fun… the point is that lately, when I call a lawyer to discuss something I've heard about or read, the answer comes back loud and clear on many occasions: "I've tried it before and it didn't work." It's really a dangerous aspect of battle fatigue… especially when fighting a war where the rules of engagement are changing almost every day. I mean, can you imagine the battle fatigue that the civil rights attorneys were feeling after decades spent going up against a United States Supreme Court continuing to uphold Jim Crow laws and the separate but equal doctrine, which had been established by the high court in Plessy v. Ferguson, 163 U.S. 537 (1896)… and continued for some 60 years until Brown v. Board of Education, 347 U.S. 483 (1954)? You talk about tired and beat up… I can't even imagine. And what if Oliver Brown and his daughter Linda had gone to see one of these battle fatigued attorneys on the wrong day asking for his help. Mr. Brown might have said, "But my daughter should be allowed to go to the school that's only a few blocks away from her home. Will you represent us?" And the lawyer, tired of getting his or her butt kicked over the issue, might have replied, "I'm sorry, I tried it before and it didn't work." And where would we be today, I ask you? Okay, maybe exactly where we are now, as the Brown case really was a class action and there were many others involved, but just think how you as a lawyer would feel knowing that you missed that kind of opportunity because at the time you were just that sure that nothing else could be done, or done differently. Vermont Says Standing Matters… As to the issue of whether the trust can show that it actually owns the note, Vermont's Supreme Court on July 22, 2011, sent US Bankcorp packing when the bank failed to show credible evidence that it had standing, or in other words, something that proved it had the right to foreclose. The case started back in 2009, when US Bank waltzed into court with an assignment from MERS signed by… wait for it… none other that Jeffrey Stefan, the infamous robo-signer from GMAC who the assignment said was a "Duly Authorized Agent and Vice President of MERS." My new friend, Abigail Field, who writes for Fortune Magazine, covered the story in some depth, under the headline, "VT Sup CT: Yes, US Bank, You Have to Prove Standing," and I just know she wanted to finish that headline with an expletive, but like me is far too dignified and erudite to sink to such a level. (We leave that sort of thing to Tiabbi over at RS.) (Hey, shut up over there, I heard what you're thinking… but look, she's a new friend and we don't have to tell her everything about Mandelman Matters all at once, now do we? We don't want to scare her away.) Here's just a skosh (which is either slightly more or less than a smidgeon), of what Abigail had to say about the case on her blog… Reality Check… "Six months later, Kimball received two letters contradicting US Bank's claims. First, Kimball's mortgage servicer, Homecomings Financial sent a letter that saying that GMAC was taking over servicing her mortgage. Second, GMAC sent a letter not only confirming the change but noting that it was servicing the mortgage on behalf of Residential Funding Corporation, not US Bank." "After Kimball pointed out the contradiction to the court, US Bank tried again. The bank produced a new version of the Kimball note, a copy specifically endorsed Accredited to Residential to US Bank and supported by an affidavit signed by…Jeffrey Stephan as "Limited Signing Officer for GMAC." However, as the Supreme Court noted, at the time US Bank made no claim in the affidavit or otherwise as to when those endorsements were made. The trial court found the evidence that US Bank had the note prior to starting the foreclosure inadequate and dismissed the foreclosure." You know where this is going, don't you? It's a lot like the Ibanez case in Massachusetts this past year, once the banksters start down the rabbit hole, there's no stopping them. Like my mother, and as I found out years later, Sir Walter Scott both used to like saying, "Oh, what a tangled web we weave when first we practice to deceive." (And no, it wasn't Billy Shakespeare, but thank you for playing.) So, after presenting to the court just about as many conceivable fraudulent iterations of the required documents as could be imagined, US Bancorp tried a highly technical approach known in legal circles as "begging and pleading," but the court wouldn't have it and told the bank it would have to start all over if it wanted to foreclose on the property… and even though the bank would be passing GO, it would not be permitted to collect its $200… or maybe I just imagined that last part. Then, US Bankcorp's lawyers said something to the justices about their decision being somehow "wasteful," which just goes to show you that among the bankster class, hubris has no bounds… and the high court replied… "While we are sympathetic to the desire to avoid wasteful and duplicative litigation, the source of the unnecessary proceedings in this case was not an overly wooden application of the rules, but US Bank's failure to abide by them. It is neither irrational nor wasteful to expect the foreclosing party be actually in possession of its claimed interest in the note and have the proper supporting documentation in hand when filing suit. Nor is it irrationally demanding to expect the foreclosing party to provide adequate, satisfying proof…What should have been here a straightforward, if not summary, proceeding under the rules was rendered inefficient by US Bank's failure to marshal its case before compelling the homeowner and the court to waste time and resources, twice, by responding to what could not be proven." To which I would have to say… Oooh, SNAP! The court then ordered that the trial court consider awarding Vermont Legal Aid its fees for all the time spent dealing with US Bankcorp's fraudulent papers. I know what you're thinking…. Oh no they didn't… but, oh yes, they very much did. Now, I feel like I should clarify that Vermont has both judicial and non-judicial foreclosure statutes, and although I'm not entirely sure, the way I read it residential foreclosures are handled via the judicial process. Regardless, this case is just another shining example of banksters, unable to prove that the trust owns the loan, and trying to correct the problem by committing fraud and forgery, among other crimes I'm quite sure. Of course, I'm absolutely certain that Tom Deutsch of the American Securitization Forum, will praise the decision as being nothing short of fabulous for the future of foreclosures and securitization itself, while banking industry lobbyists will once again declare this case to be only an isolated incident and not representative of a larger problem, but… well… to those statements I can only say: Hahahahahahahahaha… (Was that too subtle?) Horace Hears a Woo(ten)… Another case that should cause foreclosure defense lawyers everywhere to realize that no one knows what tomorrow will bring is Horace v. La Salle, which was brought by Alabama foreclosure defense attorney Nick Wooten. The judge in Atlanta this past April, ruled that the homeowner was an intended third party beneficiary of the Pooling and Servicing Agreement ("PSA")? (And if you like apples, how do you like them apples?) It's true… the judge found that the securitization process as described in the PSA, was not followed and therefore Horace's loan was never transferred into the trust that was now trying to foreclose. (I recently produced a podcast with Nick Wooten and if you haven't already listened to it, you really should try to make the time. It's titled "No Friend to the Banksters.") According to HousingWire, and I love quoting them because they are definitely a Hampster-friendly website, so what they say always makes the banks look as good as possible. "The ruling prevents defendant LaSalle Bank – as the trustee holding the plaintiff's securitized mortgage – from proceeding with a foreclosure because the trust failed to follow its own pooling and servicing agreement, and did not follow applicable New York law when trying to "obtain assignment of Horace's note and mortgage," according to the court order. Without proof the mortgage had been assigned to the trust, in this case a Bear Stearns-related mortgage trust, the trustee lacked standing to foreclose, the court found." Nick Wooten's a rock star foreclosure defense lawyer, one of the best in the country by any measure, but he's lost his share of cases that perhaps he should have won just like every other lawyer involved in this fight has, and in fact I happen to know that Nick had just lost the U.S. Bank v. Congress case going into Horace v. La Salle… so we should all be thankful that Nick wasn't so fatigued that he told Mr. Horace… "I tried it before and it didn't work," and instead went right back into court swinging for the fences… and as a result hit one right out of the park for Mr. Horace. My point, and it really should go without saying, is that lawyers should not give up just because they've tried something before and didn't see the desired results then… because THEN may very well not be NOW. Of course, not all lawyers are exhibiting such signs of fatigue, in fact there are many that continue to raise the bar by bringing litigation that challenges the status quo. You can find many among those that make up Max Gardner's Boot Camp Army of more than 800 lawyers, all trained by Max and his other experts in the fine art of beating banksters in one way or the other. One California lawyer I've gotten to know pretty well over the last couple of years is Nathan Fransen of Fransen & Molinaro in Corona, California. Nathan has four or five cases headed for trial this fall that could positively impact the landscape for homeowners in California. One such case, seeks to cancel the Trustee's Deed Upon Sale… based on the argument that the foreclosing party, a trustee, didn't have the authority to foreclose because the assignment of the Deed of Trust from the originating lender to MERS was invalid, as the originating lender had already transferred the note to the trust. It gets confusing, I realize, but basically the case is saying that an entity cannot assign what it never had in the first place. The homeowner's residence, in this case, has already gone back to the bank, but if the homeowner prevails, Fransen says there are a range of possible outcomes, including the potential for an award that includes punitive damages. Also recently, I saw a great example of a law firm going the extra mile when a lawyer from the firm, Mitchell J. Stein & Associates in Calabasas, California, representing a homeowner in Unlawful Detainer Court, of all places, won by arguing that Deutsche Bank lacked standing. Had I not seen and heard it first hand, I don't think I would have believed it. As a matter of fact, that case was part of what motivated me to write this article in the first place. California is a non-judicial foreclosure state in which, as its been explained to me, there is no requirement that the party foreclosing prove they have standing. In California, as far as standing goes, you can basically foreclose on someone's home using a Snickers' bar wrapper. And, you have to understand, I've come to recognize UD Court as the end of the road… because that's what I've always been told by the California foreclosure defense lawyers I've asked. It's the court where they tell you to be out of the house in 30 days, or whatever… so, it's the last stop on the foreclosure train and these days, it takes at least a couple of years before you get there. After UD Court you just try to forget the nightmare ever happened, and hopefully start realizing that there is life after foreclosure. Frankly, it can sometimes be hard to even get a lawyer to accompany you to UD Court in California… that's how little there is for them to do there… usually. But in this case, a Mitchell J. Stein & Associates attorney by the name of George Baugh, went into UD Court with his client, argued that Deutsche Bank lacked standing… and sent the bank packing instead of the homeowner. I tell you, I wanted to stand up and cheer… I didn't… but I wanted to. (I am learning how to moon walk just for those situations, however, and once I can pull it off… well, watch out.) Apparently, and I had to ask Mitch to explain this to me like three times before I really got it… the combination of the non-judicial foreclosure state with the summary nature of the UD proceeding, deprives the homeowner due process if not allowed to argue standing. (Again, please don't take what I just said to court, but it's at least close to being correct, so if it seems applicable, I'd certainly run it by your lawyer if UD court is in your immediate future, or if you're a lawyer defending homeowners in these types of situations call Stein's office and ask him about it yourself.) And another Southern California lawyer I know quite well, Barbara Gilbert, has been using the Consent Orders that were released by the OCC this past April at the conclusion of the regulator's investigation that began in the fall of 2010 following the robo-signing scandal. Gilbert prefers basing her arguments on the "nuts and bolts facts" established by the OCC's investigation and has had a significant amount of success doing so. The Threat of the Dreaded FREE HOUSE… Now, let's not pretend we don't all know the real issue here… it's the threat of the dreaded FREE HOUSE that's causing members of the judiciary to rule with decisiveness one might expect from a Christian Scientist with appendicitis. I mean… if the judge follows the law, someone might get a free house… or at least that's the rumor. The phrase "free house" is a relative newcomer to the American lexicon. Up until this past year or so, I don't think I've ever heard the two words used together, in fact I don't even remember a game show offering the chance to win such a thing. A free car… perhaps, but a free house… why apparently that's just plain wrong under any circumstances as far as millions of Americans are concerned. And I have to admit… I would never have guessed the idea would be so objectionable to so many. Some have come to think that a "free house" is the goal of today's homeowner who is threatened by foreclosure and therefore is either suing or being sued by their bank, and the idea that someone who couldn't make their mortgage payments could possibly end up owning their home free and clear seems capable of transforming otherwise peaceful suburbanites into bloodthirsty revolutionaries. The idea is so eminently capable of inciting people to riot, it makes me wonder if despots have used the concept before to unite people against a common enemy. I don't speak German. Do you suppose those speeches by Joseph Goebbels, filmed by Leni Reifenstahl implied that Jews were getting free houses? And many of the people, upon hearing of the free house conspiracy, started supporting The Final Solution? It sounds silly on its face, but after witnessing the power of the phrase first hand, I'm not so sure there isn't something there. Homeowners didn't start the "free house" discussion, and as I've said many times before, it would likely never have come up had the banks done what they said they'd do… what they contracted with the federal government to do… modify mortgage payments when in the best financial interests of the investors that own the loans. They didn't do that, however, at least not in sufficient number, and not only that… they disrespected and even outright abused people because they didn't care about homeowners or the federal government… they only cared for themselves and even then, only for themselves in the very short term. I think the idea of someone being awarded a house sans mortgage started with discussions as to what would happen were it determined that the REMIC trust did not own the loans because they were not properly transferred in compliance with the PSA ("Pooling and Servicing Agreement") and the IRC ("Internal Revenue Code"). Some said were it not done properly it would be a "nullity," which was another word with which I was not familiar, but that seemed to mean the mortgage would be null and void. Others weighed in… no, it could not be possible… someone had to own the loan… there was no such thing as a free house. But that only intensified the debate, and over a very short period of time, the free house debate was in full swing, and the more egregious the servicers' behavior became, the more people were drawn to the idea as being representative of justice in light the indignities they had been forced to endure at the hands of the banksters. I actually understand the thinking… I can't stand what the mortgage servicers have been allowed to do to people… I've seen it up close and personal, seen the impact they've had on senior citizens among others, and I can say without reservation that I never imagined that Americans would be treated as the servicers have treated them without riots in the streets. As someone who hears from homeowners all over the country every single day… people are way beyond pissed off… they are flat out enraged. The simple fact is that the decisions made by those in the Obama Administration, whatever one might claim they accomplished, have also caused us to lose a part of our country that we will never get back. So, next thing you know, the idea of getting a free house started becoming worthy of serious discussion in some circles… various websites fanned the flames, and marketers no doubt played the idea up… and I suppose all of that is better than people sitting around having lost all hope trying to figure out how to most definitively regain their personal power. But, regardless, homeowners are not trying to get free houses… they simply wanted their loans modified so they could stay in their homes… like President Obama said they'd be able to, by the way. It's also worth noting that it's the bank attorneys that perpetuate the rumor about homeowners wanting free houses because they want judges, politicians and those in the mainstream media to believe that's the potential outcome if servicers were to be held to the letter of the law… a free house for someone who wasn't making their mortgage payments. The horror, you say. It's almost as if the bank's lawyers say to the judge… "Your Honor, don't listen to what the other side has to say… all their trying to do is get a free house." And then, regardless the facts, the homeowner loses because the potential of a free house clearly represents a grossly inequitable resolution. Kathrine Porter, recently writing on the blog, Credit Slips, titled her post, "The Myth of the Free House." Her main point was that just because it were deemed that a trust did not own a given loan… someone owns it and so the homeowner would have to pay that entity. I commented on Katie's post, pointing out that although she was undoubtedly correct as a matter of law… as a practical matter, there are other dynamics involved. So, what happens if a court rules that a trust doesn't own a loan and therefore cannot foreclose, but no one else shows up to claim ownership of the loan? You see, the key components that make the securitization scheme work are the REMIC trusts, with their pass-through tax status, and the off-balance-sheet Special Purpose Vehicle or SPV, which allows the banks to get the loans off of their books. Similar to a Sub-chapter 'S' corporation, the REMIC trust pays no taxes on investment gains, rather the payments pass through to the investors who own the "pass through certificates," which one can think of as being like a bond or other debt security, and the investors pay taxes as individuals. Without the REMIC trust, therefore, the payment streams resulting from people making mortgage payments would be taxed twice, once when received by the trust and again as income to the investor, and that would significantly reduce the percentage returns available to investors. As far as loans remaining on a bank's balance sheet as opposed to being transferred off into an SPV, were that the case the bank would have to set aside funds in a special reserve account to cover potential future losses. The reserve account is commonly referred to as the ALLL, which stands for Allowance for Loan and Lease Losses, and the bottom-line is that money in that account reduces the amount available for bonuses… and all bankers hate that. The simple fact is that when you take the REMIC trust out of the equation, I'm not at all sure that the other parties involved, such as the "bank-as-securitization-sponsor" or "bank-as-loan-originator"… wants the loan… or the house that goes with it for that matter. In fact, I'm pretty sure that neither does, and if that's the case it may just be that the homeowner could end up with a loan for which no one wants to be repaid. You see, the bank coming forward to claim such an orphaned loan once it's been determined that it was not properly transferred into the REMIC trust… assuming the bank-as-sponsor or originator is still in business and not long gone into bankruptcy… would trigger at least five events that would make it not worth claiming. 1. For one thing, the sponsor or originator claiming the loan would now have a loan on their books and therefore the bank would have to reserve for the potential losses. Because these are loans that were in foreclosure, the amount to be reserved would be substantial. 2. Without the REMIC trust, the loan would become a taxable asset so the bank would have to pay roughly 30% tax on the income stream received from the loan, assuming the borrower pays the payments. 3. As the new owner of the loan, the bank would have to pay the costs of foreclosing on the delinquent homeowner, and bringing the house up to code so that it can be put back on the market and hopefully sold in the bank president's lifetime… and that may not be the case. Depending on the property, it may not be worth doing. 4. Showing up and claiming the loan is kind of an admission that the bank failed to properly negotiate the loan into the trust in the first place, and they'll likely get sued for that or at a minimum forced to buy back the loan from the trust. If the bank does nothing, it may be difficult for the investors to establish that the loan was ever supposed to be in their specific trust for the same reason the court ruled it was not and therefore couldn't foreclose. 5. Remember… the bank securitized the loan already… they may have done it wrong or badly, but regardless… they've already been paid for the loan. Why bother showing up to claim it in light of the above mentioned facts, when the bank has already been paid for the loan in question. And then there's the reality that in many cases, the bank-as-sponsor and bank-as-loan-originator will both be long gone into bankruptcy, as would be the case with Washington Mutual, IndyMac, Lehman Bros., Bear Stearns, et al. So, then what? So, as a practical matter, once a loan is found to not have been properly negotiated into a REMIC trust by the closing date as specified in the PSA, even though there may be a sponsor or loan originator who could theoretically claim to be the rightful owner of the loan… my guess would be that neither will… there's simply no percentage in it. So, what happens then? Does the homeowner then have a "free house," since that's the term du jour? Can the homeowner seek adverse possession of the property? Or are they forced to live under the uncertainty of not knowing what tomorrow will bring indefinitely? It's a bizarre situation, to be sure… but it's not one in which the homeowner is involved in any way. It's the bank that securitized their bed, and they should not be allowed to lie in it. So, it's like a riddle… When does a homeowner get a "free house?" Answer: When whoever is owed doesn't want to be repaid? In Closing… Let me be blunt about something… There have been no private securitizations of debt to speak of in this country since July of 2007. That means no secondary mortgage market, so today the federal government is essentially the only mortgage lender in the country… 96-97% of all mortgages originated in this country are from Fannie, Freddie or FHA…. and in case you haven't noticed, all three of them are technically bankrupt. Until we have private securitizations being purchased by investors around the world, we are in deep kimchi economically speaking, because our banks are going to be technically insolvent for years and years to come, and even if a bank were to decide to start lending again, credit requirements will remain so tight for so long that it won't matter. By then our country will look and feel very different than it does even today, to say nothing of what it was like a decade ago. Investors all over the world were badly burned by Wall Street's banksters as they circled the globe pedaling CDOs, synthetic CDOs, synthetic CDOs-squared and even cubed… and there's only one way they'll ever consider such investments again… if they see that we are a nation of laws, and that we uphold those laws regardless of whether it's inconvenient that we do so. There are many examples of when upholding the rule of law has a objectionable outcome. The murderer or drug dealer who is caught red-handed, but as a result of an illegal search, comes to mind. No one likes such an outcome, but as responsible Americans we recognize that it is more important that we are protected by our constitutional rights, and if it means that someone that should not go free, does go free… well then, so be it. We all are protected from illegal search and seizure by the fourth amendment to the U.S. Constitution, and that's not something we should ever compromise. Well, now we are facing an economic challenge such that our nation has never had to face before and the entire world is watching. Will we rise to the occasion and follow the rule of law regardless of the outcome, or will we show the world that we are not what we've claimed to be all these years? Is this a country in which no one is above the law, or do we have a privileged class to whom our laws do not apply? Do we only follow the laws we think we can afford to follow, and leave behind those that we see as too costly? These are the questions being asked and answered every day ever since the global credit crisis began in July of 2007, when investors around the world lost trust in the credit ratings of our debt securities and stopped investing in them as a result. Just over a year later it became clear that Wall Street's banks were insolvent, that the U.S. housing market was in a free fall, and that our nation was entering an economic downturn the likes of which had not been seen in 70 years. Almost three years later, although thus far we have avoided much pain, we haven't cured the disease by any means. Going forward, however, we're going to have to answer some tough questions… make some hard choices… endure difficult times… it's not about a "free house," it's about whether we are the country we've said we are all these years, or whether we've become something less. Do the laws apply to Wall Street's bankers or don't they? Will we protect them from punishment as the world suffers from their bad acts? Is this a land of justice for all, or is justice only for the privileged few? And how come it's okay for our banksters to profit from destroying the global financial system, using taxpayer dollars to pay themselves billions in bonuses as the country's economy slides off a cliff, but many seem to more offended because Charlie Smith over in Tampa hasn't made his mortgage payment since last October? Wake up people, we're running out of time. We need to do better and that means we need to get smarter. And since I still have faith that our laws will prevail, we'll be needing our nation's lawyers to help get us through this, so stay with us… as has been the case in our past, only united will we stand. Mandelman out.
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