Waking up to discover the mortgage market was a giant criminal enterprise

Vampire squid

Vampire squid

Matt Taibbi

This is a potentially gigantic story. It seems that a court has ruled that about half of the mortgage market [MERS, Mortgage Electronic Registration Systems] has been run as a criminal enterprise for years, which would invalidate any potential forelosure proceedings for about, oh, 60 million mortgages.

Global Research explains

The real parties in interest concealed behind MERS have been made so faceless, however, that there is now no party with standing to foreclose. The Kansas Supreme Court stated that MERS’ relationship “is more akin to that of a straw man than to a party possessing all the rights given a buyer.”

That’s because the mortgages were bundled into bonds, sliced and diced futher into bizarre financial entities called CDOs, and which point ownership and control becomes nebulous at best.

Only the securities holders have skin in the game; but they have no standing to foreclose, because they were not signatories to the original agreement. They cannot satisfy the basic requirement of contract law that a plaintiff suing on a written contract must produce a signed contract proving he is entitled to relief.

And they go on to say that a major player in creating CDOs is everyone’s favorite vampire squid, Goldman Sachs.

The pirates seem to have captured the ship, and until now there has been no one to stop them. But 60 million mortgages with fatal defects in title could give aggrieved homeowners and securities holders the crowbar they need to exert some serious leverage on Congress – serious enough perhaps even to pry the legislature loose from the powerful banking lobbies that now hold it in thrall.


  • Sue

    Finally. It’s been apparent for some time, and for this very reason, that a bond pool (squared, cubed, etc.), supposedly collateralized by mortgages more than one level away, is effectively *not* secured. Question: How do the bond holders reach through the byzantine structure to satisfy the obligation? Answer: Apparently, they don’t.

  • Reader

    I have a somewhat bizzarre investment called a “strip.” It’s based on an SBA loan. When the banks make the loans, they may do so at differing interest rates. In order to pool the loans, the rates must be the same. So they “strip” the extra interest off, pool those strips, and sell them. There’s no principal attached, just a small (1/4 to 1/2%) stream of interest on the loan.

    I knew when I bought this that it was a risky investment. The loan is aguaranteed by SBA, so whoever holds the principal note gets paid back even if the borrower defaults. But the strip only generates cash flow as long as there is principal outstanding. If the borrower deaults or pays off, the strip becomes worthless. And yes, there’s a ton of very non-specific IRS regulation about how to claim income on these!

    My point: nobody lied to me about the security of this arcane instrument. It’s risky, and they told me that. Of course, the broker also owned them himself, and told me how great they’d performed for him… that was before the recession. I’ll be lucky to get my investment back.

    I realize that CDOs and other types of instruments based on mortgages were made with certain assumptions that had never been tested in court. But I gotta say, what were these buyers thinking? If you own a fraction of a mortgage, can you repossess a fraction of a property? Sounds like a “Duh” to me.

    I suspect this will also put a dent in the Fed’s efforts to resell toxic assets– if there’s no security, there’s not much value.

  • The other major point is MERS itself is unreliable

    “The court ruled that the electronic transfer system used by the private company MERS — a clearing system for mortgages, similar to a depository, that is used for about half the mortgage market — is fundamentally unreliable

    Since a sale isn’t legal unless there’s full transfer of the physical note, a lot of the sales of mortgage-backed securities were not entirely legal, since the actual notes were often not transferred.”

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