Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Posted 2010-09-21 10:49
by Karl Denninger
in Banking System

How To Resolve The Foreclosure Mess

Ok, we now appear to have a pattern of conduct here where organizations trying to foreclose on homeowners are in fact submitting forged (that is, willfully known to be false) affidavits to courts around the nation.

First we had GMAC, now it appears we have JPM/Chase.

Everyone's scrambling on this, of course.

But as I pointed out, the real panic is likely still to come, because I have reason to believe (but cannot yet prove) that many if not most of the non-agency securitizations were defective at the outset.

Worse, they're now trying to cover it up.  I am amassing more and more information on the mess, and what I'm seeing is increasingly looking like a pattern of conduct that may well go far beyond "innocent mistakes" or "accidents."

So let's take a close look at this problem, and how we can fix it.

There's a real visceral outrage at letting people have a "free house." 

But is it really a perversity of justice if that's what happens in point of fact - or effect?

Maybe not.

Look, if I want to write you a signature loan for $200,000, I have every right to do it.  If you don't pay I'm screwed in such a case, because I have no security interest.  If you go bankrupt I'm really hosed, as that debt will be discharged and I'll probably get zero (or damn close to it.)

So why should we care if banks and others stupidly wrote what amount to signature loans?

We shouldn't.

This is how we should resolve this.

  • For each and every loan that was not properly conveyed into the MBS trusts and cannot be proved to have been properly conveyed, the purchasers of such MBS have every right to sue the banks that created these MBS for fraud.  They received a representation and warranty that the deeds and notes were taken in good recordable form.  They were not.  This is fraud - period - which entitles them to force the bank involved to either fix the problem (if it can) or buy back the MBS at par.  They should immediately do so.

  • For each and every loan that was not properly conveyed into the trust the net effect is that the mortgage (deed) and note have been split.  This is a permanent deficiency.  The buyer of the home therefore has title and he paid with an unsecured loan.

The net effect here is that the buyers of said homes have a signature loan for the entire mortgage balance.  If they do not pay, the holders of those notes (whoever can prove they actually are holding the note) can attempt to collect it.  The buyer can in turn declare bankruptcy, discharging the note.  In states where there is a 100% homestead exemption for a primary residence (Florida among others) this has the effect of the buyer getting a "free" house.

Note that the house isn't really "free".  Yes, it's free of debt, but the buyer, in order to avoid being hounded for the debt, still has to go through bankruptcy.  He still has his credit trashed, and justly so.

But he doesn't lose the house.  It doesn't fall into disrepair.  It isn't trashed on the way out, nor by vandals after the fact.

This is justice folks.  It is not "unjust enrichment."

The seller of the money had every opportunity and right to properly convey the notes and mortgages into the trusts.  They had every right, duty and opportunity to keep the wet signatures, instead of intentionally destroying them.  And they had every right and opportunity to only swear in court to that which was actually supported via personal knowledge in an affidavit.

Instead, the sellers of the money made decisions - business decisions - that they would play fast and loose with the law and, it appears, that they would swear falsely in court. 

These decisions are theirs alone, and they alone MUST bear the consequence of having done so.

First, there is plenty of emerging evidence that many of the notes and mortgages may have not been properly conveyed into the trusts.  This is a fraud upon the MBS buyers, who were sold this paper with the representation and warranty that these notes and deeds were conveyed in good recordable form.

Second, there is now emerging evidence that when these notes go bad the above deception comes to the fore.  Unable to produce an actual note (because it was in many cases intentionally destroyed after not being taken in good recordable form!) we have "foreclosure mills" that are literally making things up and swearing to affidavits that they don't have actual and personal knowledge of (because they can't have knowledge of something that isn't true!)  In at least one case they got caught by the judge, who found that they committed fraud upon the court.

So here's the resolution folks, and this is what we, the people must demand from our lawmakers in Washington DC:

  • Those who bought a house with a note that was not properly conveyed into the MBS trust, irrespective of how that defect took place, must be recognized as having bought the house with a signature loan - that is, an unsecured borrowing.  The house is theirs.  The holder of the note (if all the finger-pointers can figure out who it is) is welcome to try to collect the unsecured debt.  The owner is also welcome to file bankruptcy, throwing off the debt and in some cases, depending on state law, keeping the house.  This immediately resolves the foreclosure mess for those who bought with non-agency mortgages where the trusts and paper path are defective (which is a huge percentage of the bubble homes.)

  • Those who bought MBS from institutions that improperly securitized this paper can and should sue the securitizers to well beyond the orbit of Mars.  They are due full recovery for what was perpetrated upon them.  This too is entirely within the law and requires nothing new.

  • We must demand an expedited bankruptcy process that citizens can use to deal with this.  Everyone should be able to use it once - walk in, leave your assets at the door (ex qualified retirement accounts and, where allowed, your primary residence) and walk out clean.  It trashes your credit but it clears the market, it clears the debt overhead, it actually de-levers households and, as the forced deleveraging flows through the banks and business, delevers them too.

  • Finally, if this bankrupts one or more large banking institutions, so be it.  We now have "resolution authority", let's see it used.  Sheila Bair, go to work damnit.  We need a banking system, but not particular banks.  More importantly, it is absolutely critical that those people who did this not get away with it and be able to keep the ill-gotten gains that they "earned" by violating both the law and the covenants they proffered to buyers of this paper.

I recognize that this will provoke howls of protest from the banksters and probably others.  So be it.  It will also work, and while it will produce a short-term economic dislocation, especially among the banksters (not to mention a hell of a lot of litigation by MBS holders!) we will have resolved and cleaned up the housing bubble by doing this, instead of continuing to attempt to draw it out.

It's time folks - let's get it done.
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OK, the Fraud Upon the Court link appears to be borked.

Here is the case it leads to:

Pocopanni Order Dismissing With Prejudice

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