Mortgage Market A Giant Criminal Enterprise - By Matt Taibbi

Read more at: http://www.huffingtonpost.com/2009/09/22/matt-taibbi-mortgage-mark_n_295136.html

The court ruled that the electronic transfer process used by the private company MERS, a clearing process for mortgages, similar to a depository, that is used for about half the mortgage market is fundamentally unreliable, & any mortgage sold and/or transferred through MERS cannot be foreclosed on, at least not in Kansas.

A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically & tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS & recorded in its name. Holdings of the Kansas Supreme Court aren't binding on the rest of the country, but they're dicta of which other courts take note; & the reasoning behind the decision is sound.

This is a potentially gigantic story. It seems that a court has ruled that about half of the mortgage market has been run as a criminal enterprise for years, which would invalidate any potential forelosure proceedings for about, oh, 60 million mortgages. The court ruled that the electronic transfer process used by the private company MERS — a clearing process for mortgages, similar to a depository, that is used for about half the mortgage market — is fundamentally unreliable, & any mortgage sold and/or transferred through MERS can’t be foreclosed on, at least not in Kansas.

Coincidentally I’d been working on something related to this all day yesterday. All over the country, lawyers are contesting foreclosures because of similar chain-of-custody issues. I have some material about this coming out in my next Rolling Stone story, so I can’t get in to this much, but suffice to say the lenders & the banks were sloppy about their paperwork (at best — there is a fraud angle as well) & jammed up the process with missing and/or mismarked mortgage notes. 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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Primary and Secondary Mortgage Markets

The key economic function of a mortgage lender is to provide funds for the purchase or refinancing of residential properties. This function takes place in the primary mortgage market where mortgage lenders originate mortgages by lending funds directly to homeowners. This market contrasts with the secondary mortgage market. In the secondary mortgage market, lenders and investors buy and sell loans that were originated directly by lenders in the primary
mortgage market. Lenders and investors also sell and purchase securities in the secondary market that are collateralized by groups of pooled mortgage loans.

Banks that use the secondary market to sell loans they originate do so to gain flexibility in managing their long-term interest rate exposures. They also use it to increase their liquidity and expand their opportunities to earn fee-generated income.

The secondary mortgage market came about largely because of various public policy measures and programs aimed at promoting more widespread home ownership. Those efforts go as far back as the 1930s. Several government-run and government-sponsored programs have played an important part in fostering home ownership, and are still important in the market today. The Federal Housing Administration (FHA), for example, encourages private mortgage lending by
providing insurance against default. The Federal National Mortgage Association (FNMA or Fannie Mae) supports conventional, FHA and Veteran’s Administration (VA) mortgages by operating programs to purchase loans and turn them into securities to sell to investors.

Most of the loans mortgage banks sell are originated under government-sponsored programs. These loans can be sold directly or converted into securities collateralized by mortgages. Mortgage banks also sell mortgages and mortgage-backed securities to private investors. Mortgage-backed securities, in particular, have attracted more investors into the market by providing a better blend of risk profiles than individual loans.

Background of mortgage banking, the basics of mortgage banking

Depository institutions have traditionally originated residential mortgage loans to hold in their loan portfolios, and mortgage banking is a natural extension of this traditional origination process. Although it can include loan origination, mortgage banking goes beyond this basic activity. A bank that only originates and holds mortgage loans in its loan portfolio has not engaged in mortgage banking as defined here.

Mortgage banking generally involves loan originations , purchases, and sales through the secondary mortgage market. A mortgage bank can retain or sell loans it originates and retain or sell the servicing on those loans. Through mortgage banking, national banks can and do participate in any or a combination of these activities. Banks can also participate in mortgage banking activities by purchasing rather than originating loans.

The mortgage banking industry is highly competitive and involves many firms and intense competition. Firms engaged in mortgage banking vary in size from very small, local firms to exceptionally large, nationwide operations. Commercial banks and their subsidiaries and affiliates make up a large and growing proportion of the mortgage banking industry.

Mortgage banking activities generate fee income and provide cross-selling opportunities that enhance a bank’s retail banking franchise. The general shift from traditional lending to mortgage banking activities has taken place in the context of a more recent general shift by commercial banks from interest income activities to non-interest, fee generating activities.