Over the past week or so, the banking industry has leaned on its allies in the media to try and change the narrative around the upcoming foreclosure fraud settlement and, more particularly, changes to the way mortgages get financed and serviced, as well as the legal exposure for the fraud that has been committed. Last Friday, the New York Times allowed the industry to basically plant a story about how the 30-year fixed mortgage may go away if the government doesn’t issue a guarantee a la Fannie and Freddie on the mortgage market. This actually doesn’t logically follow – there are other ways to ensure this kind of product, including the new institution of a qualified residential mortgage (QRM) as exempt from the requirement banks don’t like of retaining a financial interest in the loan (QRM’s could essentially mirror a 30-year fixed with a substantial down payment). At any rate, it’s a scare tactic designed to keep the government guarantee of the market intact.
An even more pronounced pushback from banking interests came from Housing Wire’s Paul Jackson over the weekend, who lashed out at Naked Capitalism’s Yves Smith for her claim about potential major liabilities for mortgage servicers and trustees who messed up the securitization process and now have questionable claims on the underlying loans. Jackson used one case in Alabama to cry vindication, arguing that borrowers would not be able to challenge foreclosures based on faulty securitizations.
Smith replied that it seemed like a very broad statement to argue from one case in Alabama, U.S. Bank v. Congress, that banks have basically solved the securitization problem. This is the style of argument I see out of MERS, who proudly boasts of their court successes while neglecting to mention their defeats. In addition, the legal analysis from the individual judge in the case looked spotty at points. Adam Levitin, a law professor at Georgetown, adjudicates this dispute in favor of Smith:
My own take is that it is much ado about nothing. Before anyone gets too excited one way or the other about this case, let’s remember that this is a ruling by one judge in an Alabama state trial court decision. It was unlikely to get much notice anywhere else in the country, but for the securitization industry grasping for a legal victory to parade around. This court ruling doesn’t have precedential value anywhere, including in Alabama, and its persuasive value is very low too, both on account of it being an Alabama state trial court and because of the quality of its analysis. Put differently, this ain’t an Ibanez type ruling, where a leading state supreme court issues a very thoughtful unanimous opinion.
Perhaps the most important thing to note about the opinion is what isn’t there. There was no consideration of the chain-of-title issue in the opinion. Let me repeat, the court said nothing about whether there was proper chain-of-title in the securitization. Instead, the court avoided dealing with it. That means that this ruling isn’t grounds for sounding the “all clear” on chain-of-title. At best, it is grounds for arguing that homeowners won’t be able to raise chain-of-title problems. As we’ve seen with Ibanez, that’s clearly incorrect, and a closer look at the Congress ruling shows that it might be an Alabama special, not applicable elsewhere.
Do read the whole thing for a deeper legal analysis. What I want to add is that this is the second time in less than a week that a media figure has basically operated on behalf of industry to advance one of their arguments. Whether it’s fearmongering over the end of the 30-year fixed or chest-beating about how chain of title in securitization is legally untouchable, the two stories in question are less articles than conduits.
The fact is that the “nothing to see here” argument won’t work in an environment where the relatively bank-friendly Obama Administration is about to sanction mortgage servicers and banks for their conduct. Not every reporter in the country has been captured in this fashion, and some are still addressing the key issues:
Never heard of MERS? That’s fine with the mortgage banking industry—as MERS is starting to overheat and sputter. If its many detractors are correct, this private corporation, with a full-time staff of fewer than 50 employees, could turn out to be a very public problem for the mortgage industry.
Judges, lawmakers, lawyers and housing experts are raising piercing questions about MERS, which stands for Mortgage Electronic Registration Systems, whose private mortgage registry has all but replaced the nation’s public land ownership records. Most questions boil down to this:
How can MERS claim title to those mortgages, and foreclose on homeowners, when it has not invested a dollar in a single loan?
And, more fundamentally: Given the evidence that many banks have cut corners and made colossal foreclosure mistakes, does anyone know who owns what or owes what to whom anymore?
That’s the heart of this issue, and Gretchen Morgenson does a fine job explaining it. And state judges have become clued in to this legal morass. Hundreds of foreclosures in Oregon have been stopped because of the legal rulings against MERS in the state. This appears to be the case in many states across the country. One or two rulings – and a phalanx of corporate-friendly reporters willing to tout them – isn’t going to change that.