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Understanding the MERS fraud

Oct 07, 2010

http://www.ritholtz.com/blog/2010/10/foreclosure-fraud-reveals-structural-legal-crisis/

Structured mortgage securities are typically constructed as Trusts. The Trust holds the mortgage notes, which allows the bundling to occur.

Under normal circumstances, the re should be some assignment of  the Note by the original lender to the Trust. Frequently, this step did not occur. Nor did the requisite filing of the mortgage lien with the appropriate county clerk.

These errors plus the MERS issue led to very serious problems for much of the structured finance that was built on top of it. The creation of an RMBS or CDO needs at least two legal events to occur: One, the actual note the bank holds needs to be deposited into the Trust. Observe that it is the note holder who is entitled to receive principle and interest payments, who has a lien against the encumbered property, and has the right to foreclose and take the property in the event of a default.

The Note seems to  have been somehow ignored in the structuring process. And on top of that, the proper filing of the mortgage note every time a structured product changes hand was mostly ignored. As Corrente noted:

“Because of the expense, time and paperwork it would take to record each of the assignments of the thousands of mortgages in each securitization, Wall Street firms decided to just issue blank mortgage assignments all along the channel of transfers,skipping the actual physical recording of the mortgage at the county registry of deeds.

Astonishingly, representatives for the trusts have been foreclosing on homes across the country, evicting the families, then auctioning the homes, without a proper paper trail on the mortgage assignments or proof that they had legal standing. In some cases, the courts have allowed the representatives to foreclose and evict despite their admission that the original mortgage note is lost. (This raises the question as to whether these mortgage notes are really lost or might have been fraudulently used in multiple securitizations, a concern raised by some Wall Street veterans.)


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Dr. Stephen Jones


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