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Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks
A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure.
In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure.
MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership.
The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages.
That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name.
Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.
PART I. The Promissory Note Evidence Ownership of Debt and Standing to Bring Suit.
· The Fundamentals:
In the period beginning in 1999 and ending in March of 2008, Mortgage Electronic Registration Systems Inc., a/k/a/ MERS, has been named as a “mortgagee” on over fifty million mortgages. Yet MERS has never originated a single mortgage loan nor loaned a dime to a single borrower. In 2001 the New York Supreme Court ordered the Sufulk County Clerk to accept MERS mortgages for recording as a purely ministerial duty. However the Court denied MERS request for a judgment declaring that MERS mortgages were “lawful in all respects”.
The New York Court of Appeals affirmed the Supreme Court’s order directing the County Clerk to record MERS mortgages. The Court of Appeals did not reverse the Supreme Court’s denial of MERS request for a judicial declaration that MERS mortgages are “lawful in all respects”. MERS, for obvious reasons, did not want a published opinion the fact that MERS mortgages are legal nullities and/or that MERS has no standing to enforce a mortgage when it is not a creditor entitled to collect a debt. The New York Court of Appeals did address and frame these two issue but left them to be decided at a future date.
· No Note No Foreclosure
In reality MERS is really nothing more than a shell, or a front corporation for its so-called “members”. Many of these MERS members were once some of the most prestigious names in American finance. Many MERS members are now reporting hundreds of billions of dollars of losses as result of their ill conceived scheme to ramp up mortgage origination so they could pretend to flip millions of mortgage loans into trusts in exchange for trillions of dollars of investors money. One big problem was that the promissory notes were never actually delivered to the trustees of these trusts. Therefore these trusts have no evidence of ownership of the debts they purportedly purchased.
Akin to purchasing a home without being given a deed. To make matters worse many of the debts evidenced by these undelivered promissory notes were supposed to be secured by mortgage liens. However in place of mortgages being executed in favor of the original lender many of these mortgages were executed in favor of MERS. Because MERS never holds these notes or owns a debt it is not a creditor. MERS has no legal standing to enforce a debt, or so it told the Nebraska Court of Appeals in 2005. However this lack of standing defense must be raised by property owners who are sued.
The most effective economic way to raise this lack of standing defense is by bringing a motion to dismiss in response to the complaint to foreclose. In many states and in federal court this is called a Rule 12 motion. This motion is brought in place of answering the complaint. An honest attorney in most areas of the country should be willing to prepare and bring such a motion for $500.00 to $1,500.00 for a distressed homeowner. Or you might be able to find a lawyer to do it for you pro bono and perhaps a legal aid attorney. At least five judges around the country have dismissed these actions for lack of standing sua sponte, which means they did it on their own volititia. Perhaps more judges will feel the duty to do the same thing in the future. To protect the integrity of the Court.
MERS members, mortgage industry executives, invented the so-called MERS paperless system to short cut standing mortgage lending safe guards and circumvent the legal requirements for originating mortgage loans and/or for selling and transferring these loans to subsequent holders. This would allow MERS members like Countrywide Financial, Fieldstone Mortgage, and Option One Mortgage to make loans to anyone with a heart beat and then quickly flip these questionable loans to other MERS members such a Fannie Mae, Freddie Mac, Bear Stearns, Merrill Lynch, Lehman Brothers to name just a few. (”Secondary Mortgage Market Players’)
These Secondary Mortgage Market Players would claim to package millions of these loans, with or without being delivered the promissory notes, into loan pools or “mortgage backed security trusts” and then flip the loans by selling trillions of dollars of bonds to investors around the world. The bonds were touted by Secondary Mortgage Market Players as producing safe yet high returns. The investors who bought these bonds included many of the worlds largest national banks. Initially MERS members reported windfall profits year after year by quickly originating, packaging into pools and then flipping trillions of dollars of mortgages loans to investors.
Other MERS members, such as title insurance companies, also took their cut from each of the fifty million loans that were made while this high speed gravy train was rolling. MERS itself would earn over a billion dollars a year by charging its members $250.00 for each mortgage that MERS would be named as “mortgagee”.
The financial engineering (ie. mortgage securitization) helped oil the housing boom by making credit more available. But stalled housing prices and rising defaults have revealed a mess: In the rush to flip paper, lots of the new lenders or pools don’t have the proper paperwork to show they even hold the mortgage.
The reported profits from the sale of these mortgaged backed securities would result in billions of dollars of salaries and bonuses being paid to the senior executives of many of MERS member corporations. Ultimately the bond investors who actually provided all the money would learn that their “safe” investment was anything but safe. As hundreds thousands and then millions of these loans fell into default. These bondholders would lose hundreds of billions of dollars. As of April 1, 2008, the largest banks around the world had already written off loses of one hundred and fifty billions dollars relating to bonds they had purchased. One Swiss bank, U.S.B., has recently reported 40 billion dollars in losses.
These loses may only be the beginning. What many people refuse to admit is that because of the so-called MERS paperless “system” many of the so-called mortgage backed security trusts do not actually hold the promissory notes which evidence the debts that are supposed to be backing the bonds purchased by these investors. The situation is reminiscent of the great Great Olive Oil Scandal in the late 1800’s when banks were duped into investing millions of dollars into Olive Oil only to later discover that the tanks which were supposed to be holding millions of gallons of olive oil backing their investments were mostly empty.
This problem with the missing trust assets/promissory notes manifests itself each time MERS and/or the trustees for the bondholders brings a legal action to collect on a debt through foreclosure. Because neither MERS nor the bondholders trustees are holding the notes they lack proof of standing to maintain their legal actions and the actions are subject to dismissal. Many foreclosure actions have been dismissed based upon lack of standing. This a problem that it is a direct result of MERS “system”.
It appears that after MERS mortgage loans are flipped to the mortgage backed trusts the promissory notes are not actually delivered to the trustees. Nor are assignments of mortgages executed and delivered which evidence the fact the original lender has transferred the debt which is secured by the mortgage. This leaves the trusts with absolutely no paper evidence of ownership of the secured debt it purportedly owns. One informed lawyer who represents homeowners in Florida, April Charney, had foreclosure proceedings against 300 clients dismissed or postponed in 2007 for lack of standing. She is quoted as saying that “80 percent of them involved lost-note affidavits”. . .
They raise the issue of whether the trusts own the loans at all,” Charney said. “Lost-note affidavits are pattern and practice in the industry. They are not exceptions. They are the rule.” Ms. Charney, started challenging MERS and it members lost note affidavits after becoming skeptical of the a lender could possibly lose hundreds of promissory notes.
At least two Florida judges shared Ms. Charney’s skepticism regarding the copious amounts of MERS lost note affidavits and they issued show cause orders, sua sponte, challenging MERS to show proof that it held and/or lost notes in numerous actions. After evidentiary hearings these two alert judges dismissed twenty nine (29) MERS actions to foreclose for lack of standing. One judge struck MERS pleadings as being sham. A South Carolina court dismissed a MERS action to foreclose for lack of standing even though MERS filed an affidavit wherein a person claiming to be an officer of MERS claimed that MERS was holding a promissory note. The South Carolina court vetted the MERS affidavit claim that it was the holder of the note after being apprised of the fact that MERS had previously told the Nebraska Court of Appeals that it never held promissory notes.
In late 2007 three Federal Court Judges in Ohio dismissed over fifty law suits brought by trustees of mortgage backed trusts where they could not produce the original promissory notes. Following these decisions the Bankruptcy Court in Los Angeles, California adopted a rule of practice which requires all foreclosing trustees or other plaintiffs to produce the original promissory note when bring an action to foreclose a debt or face sanctions for not doing so. Several court in New York have been routinely dismissing foreclosure actions brought by MERS or its members because they continually fail to produce promissory notes.