"Mortgagegate" Mess
Research for Online Investors

by John Dalt

10/15/10

There is another storm brewing in the real estate market, and it may be bigger than the first one that has thrown our economy into a tailspin.  The home mortgage foreclosure crisis is heating up across the country as state’s Attorney Generals make headlines with investigations to protect the “little guy.”

Here is what you need to know. “Mortgage-gate” as this crisis is starting to be known, appears to be a small problem of sloppy paperwork. Sure, managers signed documents for foreclosure without carefully reviewing every page. This you will hear referred to as “robosigning.”  Here is the house in Maine that started it all.

GMAC has now been ordered to pay the pro-bono attorney representing the homeowner.  That's $27,000 plus their legal fees on a $75,000 home, and they still have not perfected a foreclosure on the property.

The Wall Street Journal reports that Erica Johnson-Seck of One West Bank signed as many as 6,000 foreclosure documents a week.  J.P. Morgan admitted their employees signed as many as 10,000 foreclosures a month.  The problem here is that each one of these documents has to be notarized.

The argument is that one person cannot review this many documents, contact the homeowners and perform the other due diligence required by law.  There are also problems with the notary required on the documents.

When a notary stamps a signature on a document, they are attesting that they witnessed the signature and that they verified the identity of the person that signed the document.  There are instances of blank notarized documents and notaries that live in a different state from where the person who signed the documents lives.

This much you may have picked up already from media reports.  These are procedural problems that can be addressed with some housekeeping.  But, there are bigger problems.  Bank of America didn’t set a new 52-week low today because of housekeeping problems.

The 300 lb. gorilla in the paperwork traces its history back to the creation of the Mortgage Electronic Registration System (MERS).  MERS was created in 1995 by the nation’s largest home lenders to aid in the securitization of mortgages.  When you borrow money on real estate the loan is recorded in your local county and MERS is appointed as the “nominee” on the mortgage.  The nominee has the legal right to assign (sell) your mortgage to another lending institution.  Once it is assigned it can be bundled with other mortgages.  Then it can be securitized by selling the bundle to another bank or investor.  Every time the mortgage changes hands, MERS keeps track of the mortgage owner on its books.

MERS has initiated foreclosure actions, as the “mortgagee of record” and been challenged.  State laws require that only the actual owner of the mortgage may file a foreclosure action.

Here is where the plot thickens.  If a mortgage is sold and changed in MERS books, local governments have laws that require the mortgage to be recorded.  Counties charge to record a mortgage.  MERS did not record any of the subsequent transactions with the counties.

MERS is alleged to owe California up to $120 billion in recording fees.  MERS is being sued for civil racketeering and the biggest banks are named in class action suits around the country.  There are also fines, of up to $10,000 per instance, for failure to record transactions with local governments.

Until Mortgage-gate is straightened out, banks will be under pressure.  SKF is the Ultra Short Financials ETF, you may want to look at it as a way to profit from the tsunami that is about to be unleashed on the nation’s largest banks.

If you think “Somebody ought to do something.”  Forget it, Obama refused to sign a bill to recognize cross state notarizations last week.  Do you think any State’s Attorney General is going to back off prosecuting an out of state bank and protecting the little guy (and state voter)?  Local governments will squeal at the chance to collect fees and fines from out of state banks.  This could take years to settle.

And who will buy a home if there is any question about the quality of the title?  It could be a long…cold…winter.

Sources for today’s article are The Market Oracle, Reuters, the New York Times and a statement by the CEO of MERS at Kansas City.com.  This statement attempts to refute some of the most damaging concerns.  When in doubt, always best to be careful.

Today's chart provides some long-term perspective in regards to the gold market. Gold has been in a strong bull market since 2001. The pace of that upward trend increased beginning in mid-2005. Following the financial crisis of late 2008, gold surged once again. Currently, gold is making new rally highs and has more than quintupled during its nearly ten-year bull market. As today's chart illustrates, however, gold is approaching resistance (red line) of its accelerated trend channel.

To the mailbox:
I was a kid in the 70's.  I remember gas rationing and not having much.  Money was very limited.  I had NOTHING extra.---paid up subscriber T.M.

John’s reply:  All the gaiety and excitement!  Bernanke gave a speech this morning promising more money.  We are working to understand and project how to help our subscribers take advantage of the coming economic consequences of these actions.

Quote:
Your life must focus on the maximization of objectivity.---Charlie Munger

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Archive

Back to Top