Are We on the Eve of the Next Bank Crisis?

During the height of the real estate bubble, mortgage lenders threw underwriting standards to the wind and made all kinds of irresponsible loans. Worse yet, Wall Street assisted them by packaging toxic loans into "securitized investments" and sold the poisonous investments worldwide, making a financial killing in the process - all the while displaying no apparent concern for the potential consequences when borrowers were unable to pay loans ridiculously above their financial means. Now, based on what one is seeing in foreclosure litigation, the bottom may be about to fall out yet again. Why? Because mortgage lenders attempting to foreclose on properties often don't hold the mortgage note and sometimes the notes cannot even be found due to sloppy transfers of documents. The question is one of whether there will be any real consequences for those on Wall Street who helped create the nightmare. Based on what we've seen so far, likely not and the taxpayer will be the one to get stuck holding the bag yet again. Moreover, until housing recovers, don't expect any real economic recovery. West Law News & Insight has details on the forces in motion that could take down Bank of America and other huge lenders: Here are disturbing highlights:
*
An important but little-understood player in the home foreclosure process, the Mortgage Electronic Registration Systems Inc., has been buffeted by a growing number of class-action lawsuits and unfavorable court rulings, a Reuters Legal review of Westlaw data shows. In addition, according to three sources, the company is under scrutiny by state attorneys general. The legal onslaught could prove to be a new drag on the still-sputtering U.S. housing market.
*
The company, known as MERS, is an electronic registry of more than 66 million mortgage loans. Created in 1995 by major banks to facilitate mortgage securitization, MERS records the transfer of deeds and promissory notes and often acts as a representative, or "nominee," for financial institutions during public auctions of foreclosed properties. Its members include the largest U.S. mortgage providers and servicers.
*
Since September, lawyers have filed class-action lawsuits against MERS on behalf of homeowners in Georgia, Florida, New York and Kentucky. The lawsuits allege that MERS did not have legitimate title to the foreclosed properties, so the foreclosures were fraudulent. Besides seeking damages, many of the lawsuits are asking for court orders to vacate all foreclosures in the states where MERS was involved. And in the last six months, judges in at least six states have halted foreclosures because they found that MERS either lacked standing to be an agent for mortgage firms or had improperly transferred ownership rights.
*
The legal assault on MERS casts doubt on the ownership rights of countless foreclosed properties. And because foreclosed properties represent such a significant segment of the current housing market -- a full quarter of all homes sold in the U.S. during the second quarter were in foreclosure, according to RealtyTrac -- the broader housing market is exposed. "A lot of people who have bought homes or are looking to buy homes are going to have a lot of problems because of MERS," said Alan White, an associate professor at Valparaiso University School of Law in Indiana who has written extensively about foreclosures.
*
In May, Kings County, New York, Supreme Court Judge Arthur Schack ruled that MERS had improperly transferred a mortgage to HSBC, when its own records indicated the party with a right to foreclose was Wells Fargo. MERS creates a "mortgage twilight zone," Schack said, calling arguments that the foreclosure in question was legitimate "incredible, outrageous, ludicrous and disingenuous." He dismissed the foreclosure and ruled that it could not be resubmitted.
*
A class-action lawsuit filed Oct. 23 in Fulton County, Ga., claims MERS has no standing to initiate foreclosure proceedings. The lawsuit seeks damages and asks the court to invalidate foreclosures in Georgia where MERS was a party. Class-action complaints filed in federal courts in New York and Florida in September make similar claims.