Hat tip to SS for sending along this article that reviews the MERS debacle:


Here is the second half of the article:

The clever designers of these vehicles tried to have it both ways by conveying the properties to an electronic dummy conduit called MERS (an acronym for Mortgage Electronic Registration Systems), which would hold them in the meantime. MERS would then assign them to the proper tranche as the defaults occurred. But the rating agencies required that the conduit be “bankruptcy remote,” which meant it could hold title to nothing; and courts have started to take notice of this defect. They are concluding that if MERS owns nothing, it can assign nothing, and the chain of title has been irretrievably broken. As foreclosure expert Neil Garfield traces these developments:

“First they said it was MERS who was the lender. That clearly didn’t work because MERS lent nothing, collected nothing and never had anything to do with the cash involved in the transaction. Then they started with the servicers who essentially met with the same problem. Then they got cute and produced either the actual note, a copy of the note or a forged note, or an assignment or a fabricated assignment from a party who at best had dubious rights to ownership of the loan to another party who had equally dubious rights, neither of whom parted with any cash to fund either the loan or the transfer of the obligation. . . . Now the pretender lenders have come up with the idea that the ‘Trust’ is the owner of the loan . . . even though it is just a nominee (just like MERS) . . . . They can’t have it both ways.”

“My answer is really simple. The lender/creditor is the one who advanced cash to the borrower. . . . The use of nominees or straw men doesn’t mean they can be considered principals in the transaction any more than your depository bank is a principal to a transaction in which you buy and pay for something with a check.”

So What’s to Be Done?

Garfield’s proposed solution is for the borrowers to track down the real lenders — the investors. He says, “if you meet your Lender (investor), you can restructure the loan yourselves and then jointly go after the pretender lenders for all the money they received and didn’t disclose as ‘agent.'”  

Karl Denninger concurs. He writes:  “Those who bought MBS from institutions that improperly securitized this paper can and should sue the securitizers to well beyond the orbit of Mars. . . . if this bankrupts one or more large banking institutions, so be it. We now have ‘resolution authority’, let’s see it used.”

The resolution authority Denninger is referring to is in the new Banking Reform Bill, which gives federal regulators the power and responsibility to break up big banks when they pose a “grave risk” to the financial system which is what we have here. CNBC’s Larry Kudlow calls it “the housing equivalent of the credit financial meltdown,” something he says could “go on forever.”

In an academic paper titled “It Isn’t Working: Time for More Radical Policies,” Prof. Randall Wray and Eric Tygmoine suggest calling a bank holiday. They write:

“We believe that most major banks are insolvent and cannot (and should not) be saved. We suggest that the best approach is something like a banking holiday for the largest banks and shadow banks in which institutions are closed for a relatively brief period. Supervisors move in to assess problems. It is essential that all big banks be examined during the ‘holiday’ to uncover claims on one another. It is highly likely that supervisors will find that several trillions of dollars of bad assets will turn out to be claims big financial institutions have on one another (that is exactly what was found when AIG was examined–which is why the government bail-out of AIG led to side payments to the big banks and shadow banks). There probably are not ‘seven degrees of separation’–by taking over and resolving the biggest 19 banks and netting claims, the collateral damage in the form of losses for other banks and shadow banks will be relatively small.”

What we need to avoid at all costs is “TARP II” another bank bailout by the taxpayers. No bank is too big to fail. The giant banks can be broken up and replaced with a network of publicly-owned banks and community banks, which could do a substantially better job of serving consumers and businesses than Wall Street is doing now.

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