Securitization, Foreclosure, and the Uncertainty of Mortgage Title

I've got a new article out in the Duke Law Journal entitled The Paper Chase:  Securitization, Foreclosure, and the Uncertainty of Mortgage Title.  The article is about the confusion securitization has caused in foreclosure cases because of the shift in legal methods for mortgage transfer and title that accompanied securitization. 

The Paper Chase is not exactly a short article, but if you're the type that's into reading about UCC Article 3 vs. Article 9 transfer methods for notes and MERS, then this piece is for you. There's a lot of technical stuff in the article, but there's also a discussion of the political economy of mortgage title and transfer law, and some thoughts on how to fix the legal mess we currently have.  Abstract is below the break:

The mortgage foreclosure crisis raises legal questions as important as its economic impact. Questions that were straightforward and uncontroversial a generation ago today threaten the stability of a $13 trillion mortgage market: Who has standing to foreclose? If a foreclosure was done improperly, what is the effect? And what is the proper legal method for transferring mortgages? These questions implicate the clarity of title for property nationwide and pose a too- big-to-fail problem for the courts.

The legal confusion stems from the existence of competing systems for establishing title to mortgages and transferring those rights. Historically, mortgage title was established and transferred through the “public demonstration” regimes of UCC Article 3 and land recordation systems. This arrangement worked satisfactorily when mortgages were rarely transferred. Mortgage finance, however, shifted to securitization, which involves repeated bulk transfers of mortgages.

To facilitate securitization, deal architects developed alternative “contracting” regimes for mortgage title: UCC Article 9 and MERS, a private mortgage registry. These new regimes reduced the cost of securitization by dispensing with demonstrative formalities, but at the expense of reduced clarity of title, which raised the costs of mortgage enforcement. This trade-off benefitted the securitization industry at the expense of securitization investors because it became apparent only subsequently with the rise in mortgage foreclosures. The harm, however, has not been limited to securitization investors. Clouded mortgage title has significant negative externalities on the economy as a whole.

This Article proposes reconciling the competing title systems through an integrated system of note registration and mortgage recordation, with compliance as a prerequisite to foreclosure. Such a system would resolve questions about standing, remove the potential cloud to real-estate title, and facilitate mortgage financing by clarifying property rights.

Comments

[DeadlyClear]

Absolutely! "because of the shift in legal methods for mortgage transfer and title that accompanied securitization"

This was "new" securitization methodology (not even the original version) and patented in the USTPO (patents - new inventions and/or business method process, i.e. software technology) in the 1990s through even today. These were not traditional mortgages as Sheila Bair points out in Bull By the Horns - these were NTMs (nontraditional mortgages).

Current state laws are not structured for NTMs - especially when it is starting to appear that the approved loans were securitized (sold, pledged, etc.) before the borrower signed the documents... and of course, had no disclosure that his collateral, credit score and promise to pay were (or had) morphed into a securities transaction.

[Bob G.]

So the govies have been so successful designing and implementing the obamacare system, that you think it would be a good idea to let them have a go at this, too? I'm sure Michelle has another good former classmate that could put this system together so that it would be one, smooth operation.

yesirree !

[lambert strethe]

So "deal architect" is the new euphemism for fraudster? Good to know.

[TedWa]

Sounds like you want to legalize everything the banksters did in clouding titles after the fact by forgiving what they did - a bank bailout. I'm still hopeful it's going to cost them trillions to straighten this mess out themselves at their own costs. What they did is unforgivable IMHO, since the wealth of this country was founded on passing of clear title.

[Shawn Newman]

I noted the following statement on page 715 of the article:

"Elimination of Negotiability. Elimination of negotiability raises a range of potential problems. It would expose mortgage investors to the risk of double selling (warehouse fraud), thereby undermining the freedom from claims that is a basic assumption for most MBS investment. Indeed, warehouse lending, which provides the financing for most mortgage banks, relies on negotiability: many warehouse-lending arrangements involve a bailment of mortgage notes with the bailee (such as Fannie Mae or Freddie Mac) having the option to purchase the notes. This option can be easily executed if the notes held by the bailee are indorsed in blank. The ambiguous nature of title to a bailment of bearer property is precisely what lubricates the system."

This assumes the bailee takes possession of the Note which, as stated in a declaration by a bank officer produced in a case I have, is not necessarily the case:

"With respect to loans purchased by Freddie Mac, when it purchases a loan from the originator, it does not normally take physical possession of the mortgage note and does not normally record an assignment of the mortgage note. With respect to loans sold by NCMC to Freddie Mac, NCMC would historically keep physical possession of the notes evidencing borrower obligations on those loans and would act as servicers for Freddie Mac."

Bottom line, IMHO - if the GSE did not take possession of the Note then it could not transfer anything to a MBS.

[Leslie]

Dear Professor Levitin,

Thank you for writing this paper.

I just wanted to say that, in particular, the last two paragraphs in your conclusion truly resonated with me.

"...The potential perversion of the law to accommodate too-big-too fail industries, rather than the risk of financial bailouts, is perhaps the most threatening part of the too-big-to-fail phenomenon because of its corrosive institutional effect. Too-big-to-fail can hold all branches of government hostage."

"Ultimately, the confusion over how mortgages are transferred represents a breakdown of our commercial-law and real-estate-law system. The mortgage title disaster represents “the greatest failure of lawyering in the last 50 years." (footnote 332) The law reforms pushed by the securitization industry in the name of efficiency undermined the legal foundation for a critical part of the economy. Going forward, rebuilding the U.S. housing-finance system must begin by reinforcing it's legal infrastructure."

*******

Yves Smith engaged you briefly in the infamous "You V JP Morgan Chase" decision handed down by the Georgia State Supreme Court in May of 2013, and I believe it (the "You v JP Morgan Chase" Decision) is a very good example of precisely your "holding hostage" characterization.

One of my greatest fears is that the judges who are allowing the law to be held hostage are unaware that, in essence, that's exactly what they are doing.

I hope they read your paper!

Thanks again.

[So Cal 7]

Prof. Levitin,
I am in the middle of your article now, focused on the UCC article 9 revisions and their meanings and effects.

Question that rises in my mind: Do these revisions alter or otherwise give room for re-interpretation of Benedict v. Ratner and "Dominion Reserved"? I would truly like your thoughts on that (and/or from anyone else).

Any other thoughts on "Dominion Reserved" as to "late" assignments (eg. transfers or attempted transfers to the Trust) and resultant claims would be greatly appreciated as well.

Thanks for the hard work I'm sure it took to put the article together. I expect it will be useful for many.

[No One Special]

My bet is our corrupt government will implement new laws that apply retroactively to make the greatest ILLEGAL transfer of wealth in this country's history perfectly legal.

American exceptionalism - at its finest.

[Todd W.]

Hang with me, as this comment is relevant to the post. It's my way of attempting to give back in the hope it will benefit others. I believe this is a way to counteract (i.e break the back) of the false stigma of the "deadbeat" homeowner when attacking clouded title, securitization, fraudclosure and the massive land grab that is in play right now.

I've been referencing Adam Levitin and Katherine Porter's work for the past few years in state, federal and bankruptcy courts and I thank them. Their research, diligence and insights have been invaluable.

As a 15yr real estate investor/developer (with an MBA), now "accidental litigator" by way of hurricane Katrina wiping out our $3M r.e. bus. literally overnight (8+yrs ago) and playing Monopoly since I was very young, I am thankful that a natural disaster "woke me up" to how the financial world (and world in general) really works.

I had no clue, despite doing a lot of deals over the years with private money, bank "money", public "money", etc.

I've also been a small private lender, so I know what valuable consideration is and when a contract is formed. I can produce the books and records and am a credible, competent, reliable witness to authenticate those books and records.

I first learned about "off balance sheet" accounting way back when I worked in the oilfield as a deep sea diver (was investing in r.e. during that time) when Enron with its 2800+ off balance sheet entities collapsed. Having diver friends from Texas and Louisiana with family members that lost everything, clued me in to the scam of using off balance sheet entities in offshore jurisdictions to willfully conceal their fraud.

Being involved in litigating many properties, I found I love the law, took to it like a duck in water, and have gotten "lucky" on a lot of occasions, having nothing to do with my abilities. The "luck" I've experienced at very precise times, is evidence to me there is some greater force at work here.

I'm knee deep in fraudclosure in multiple states, not only with our own properties, but as more people came to us for research, investigation and litigation support. It wasn't planned.

I naively reported all the well documented crimes through the "proper channels"-- FBI, IRS, AG, state attorney,judges, sheriff,attorney grievances, judge grievances, lobbied House Judiciary Committee, traveled to Panama to get a case filed with goal of going around corrupt US "just-us" system, to bring foreign judgment back to US or enforce against bank in a foreign jurisdiction---and for the most part, those efforts yielded minimal results.

On the plane back from Panama 2yrs ago, I sat next to an Italian economist for the World Bank. She asked me what I did.. "I sue crooked banks and attorneys...". She gave me her rosary beads and said "you will need these more than me..."

I'll leave off my "tin-foil" hat for now, but there are much bigger forces at play that we are all up against that are well documented. Former World Bank Senior Counsel (Yale Law) Karen Hudes and other ex-gov whistleblowers corroborates what those "PNJ's" (patriot nut jobs) have been saying for years. Matt Taibbi finally agreed in his Rolling Stone articles while covering "griftopia"

I've taken a lot of arrows as a "whistleblower", been threatened by judges for exposing fraud, attacked, retaliated against,etc but all attempts to intimidate have ricocheted.

Having been almost killed at least a half dozen times working in the oilfield, I'm lucky that every day above ground is a good day.

I have 2 young children and thankfully, a very supportive wife, that is why I do what I do. Our children will inherit the world we leave behind.

I saw a comment to a post on this site from 2011 (Standing to Invoke PSA...) where Robert Sedlar posed the "why aren't people suing to get their note/mortgage or deed of trust (personal property) back in either a replevin or trover and conversion (posted by indio007) complaint?"

I had same question. Well,....I finally got "unbusy" enough to file the first detinue complaint (Sep. 2013) for the return of personal property (note/DOT) on a purported $483,000 "loan" that was allegedly "paid in full" on 22 Dec 2006.

I've got about 60 more after the first one. Pre-suit demand letters are rolling out every day.

Detinue was the choice (in MD state court at least) as I didn't want the hassle of posting the bond as is usually required (some states have loosened the bond req.) in replevin cases.

Wetzelberger v. Friedman, et al., Circuit Court for Baltimore County, Md, No. 03-C-13-009963

Bottom line is of the 6 defendants (2 attorneys/trustees, Litton as successor to Freemont, MERS and Wells Fargo) one default is entered against 1 attorney, Litton never answered (default 2 awaiting Order) and the other 4 defendants are squealing like stuck pigs.

The usual "childish shenanigans" have resulted- ducking service, Circuit Court "losing" papers I filed (happens often), chambers judge "out to lunch" when I show up to get duplicate blank Orders of default signed when they "lose" original, frivolous motions to dismiss filed by unethical defense attorneys, etc. Anyone who has litigated in fraudclosure cases can relate.

Anyway, having corresponded with people across the country (incl. Neil Garfield) I high encourage, in fact I challenge everyone to follow this path, no matter whether you "paid off" a purported student "loan", auto "loan", mobile home "loan", auto "lease", home equity "loan", "refinance", etc.

We all know every one of these purported "loans" have been converted and "sold" via a FASIT or REMIC.

Problem is when you fulfill your purported "obligation" due to the nature and character of the securitization, it is a virtual impossibility to return the original, genuine, unaltered, authenticated instrument(s).

This doesn't even factor in LPS/DocX, Lorraine Brown document fraud. Yes, I have several fraudulent "certificates of satisfaction" filed in land records- even discovered one on a Maryland judge's home "signed" by notorious "Linda Green", have duplicate copies of "original" forged notes, etc. etc.--have laundry list of fraudulent docs and instruments.

Imagine if 100, 10,000 or 100,000 people sued for the return of their documentary intangible personal property, that has nothing to do with real property, clouded title, etc. ???

Who has more credibility now to compel the judge to do the "right thing"?

In maneuvering into checkmate, I included as exhibits not only the public record deeds of trust that every attorney involved in the detinue complaint executed (redacted personal info,) but I also included DOT's that several selective judges executed as well.

If the judge (yet to be assigned) to this case tries to fu.... me (sorry but it's happened often)they not only invalidate 600yrs of trust law, but they also invalidate their very own deeds of trust that have the exact same Non-Uniform "Release" covenant and every DOT across the country.

You lawyers out there- feel free to call me out on this, but I'm advancing that a trust arrangement was formed via the DOT. Most will point to the case law that says a DOT is just like a mortgage contract, but, every DOT states a trust arrangement is being formed. The plain language is right in every DOT. I've also discovered (while diligently pursuing commercial, contract and securities research) that under trust law no party to a trust needs to know or understand a trust is being formed. I'll gladly provide the cites is support.

The reason for pursuing trust law as the controlling law of the case is it is a very powerful way to have an obligation enforced, in my opinion more powerful than contract or commercial law. Again call me out on this, but this is what I'm advancing (along with many sub- agendas) in this detinue case.

Bottom line (in Md. at least) is if defendants, who are jointly and severally liable, cannot return my property, they have to return the value of the property instead-$483,000 face amount, not including all the proceeds made from my property.

Post default judgment on Friedman, I've requested an Order of Reference to my friendly court auditor to tally up exactly how much that note has generated in profits.

There are plenty of cases on Lexis or WestLaw supporting the "face value" rule.

I'll gladly share any/ all resources and I urge all of you (working with competent counsel and those that cannot afford it) to pursue this path.

I don't know why more people are not doing it, as it's laying right under our noses. My guess is ignorance, as I was ignorant despite being what I thought was a real estate "professional". I had no idea.....

It's just a different species of property and I can't see how any "judge" can deny the right to the return of your property when not only the custom and practice is well settled, the plain language (at least in deeds of trust) clearly provide for the return of property.

Last, I've dealt with the purported statute of limitations "defense" (generally 3-4yrs) but with recent revelation that DocX has been forging, falsifying and/or fabricating documents going back over a decade, the time starts ticking upon discovery that you were harmed.

I'll post from time to time on progress and you can check docket history- google "Maryland Judiciary" and link to case search should come up.

Hope this has been beneficial, it's the least I can do to pay it forward for all the assistance I've received over the past several years.

Todd Wetzelberger [email protected]