Taunter Media

The Kansas Supreme Court has given, if not the green light, at least a very long yellow to people who want to try to drag out foreclosure processes with versions of the “show the note” strategy:

[I]n the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable.
“The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. [Citation omitted.] Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. [Citation omitted.] The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.” Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. App. 2009).

This led Matt Taibbi, whose work is usually both witty and accurate, to have one espresso shot too many:

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 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, and any mortgage sold and/or transferred through MERS can’t be foreclosed upon, at least not in Kansas.

Over at DailyKos, JerichoJ8 goes to eleven:

Basically what the court found was that because of their crap documentation practices the banks are out of luck because they sold their interest.  MERS is out of luck because they’re just middlemen who screwed up the paperwork. The Wall Streeters are out of luck because they weren’t the parties to the original contract.

Actually, neither is really true.

To begin with, if you actually read the case, you will note the circumstances that brought everyone to the Kansas court: a guy named Boyd Kesler bought a house with a $50,000 loan from Landmark National Bank.  A year later, he took out a $93,100 second mortgage (yes, in Ford County, Kansas) with Millennia Mortgage Company.  As set forth in the mortgage document, Millennia made MERS its nominee.

Some time between the second mortgage and Boyd Kesler’s bankruptcy – and only a year elapsed between the two events – Millennia sold its interest in the mortgage to Sovereign Bank.

So Boyd declares bankruptcy and goes to sell his house to discharge his debts.  He tells Landmark and Millennia.  Landmark is the only party to show up to the bankruptcy hearing, the judge grants Landmark’s request to auction the house, get its money back, and give any excess cash to Kesler to discharge the rest of his claims.  Needless to say, when Sovereign finds out about this, it’s pissed off.  No one told it, and no one told MERS.  So both end up going to court looking to void the sale and let them go to court to argue for a new deal.

The court decided to dance along the edge of crazy but not jump:

Even if MERS was technically entitled to notice and service in the initial foreclosure action–an issue that we do not decide at this time–we are not compelled to conclude that the trial court abused its discretion in denying the motions to vacate default judgment and require joinder of MERS and Sovereign.

Although the court consistently argues that, since MERS appears in the document only as a nominee for Millennia and MERS has no economic ownership in the mortgage, MERS lost its right to notice when Millennia sold and Sovereign never acquired a right to notice when it failed to tell Kesler that it owned the mortgage, it doesn’t actually decide the case on these grounds.  It takes the somewhat more reasonable position that the trial court decided to auction the house, and what else were they going to do even if Sovereign had shown up?

If the case had decided, as a broader matter, that MERS is not entitled to good service, what would end up happening?  It would not be the case that all mortgages would be voided; it would be the case that MERS would require all exchange participants who receive any notice to forward it to MERS.  Remember, this problem goes away if Millennia just sends the notice to MERS to be forwarded to Sovereign.

But let’s go forward and imagine that the Jubilee folks are correct – some series of courts finds that the entire nation’s mortgages are invalid, foreclosures are impossible, etc.  The entire indebted American population simply repudiates its debts.  What then?  Well, the real answer for what then is that Congress very quickly stops discussing health care and passes a law superseding state laws that allows MERS records to serve as appropriate title.  But if that did not happen, the answer would be that every bank in America would fail.  And not only fail this time; there would be no hope of recapitalizing the banks, because anyone who still had two nickels to rub together would now know that the American homeowner was a lousy credit.  If you liked the last bailout, stay tuned for that one.

The show-the-note argument is somewhat similar to Beneficial Standard’s position in Liar’s Poker, when it decided to renege on a bond purchase on the grounds that it was buying mortgage bonds and oral contracts are not binding in real estate law.  It’s a cute argument, but it’s the law that denies common sense that is at fault (Beneficial Standard lost, by the way).  If you commit to a mortgage, expect to pay it or deliver the house.

Just as I was getting all righteous, James Kwak at Baseline brought a case that will truly make your blood boil:

I’m trying to figure out if I should be infuriated about the agreement allowing Bank of America to walk away from the asset guarantees it got as part of its January bailout in exchange for a payment of $425 million…

Part of that guarantee was a non-recourse loan commitment from the Fed, basically meaning that the Fed would loan money to B of A, take the assets as collateral, and agree to keep the assets in lieu of being paid back at B of A’s option. In exchange, the government would get:

(a) An annual fee of 20 basis points on the Fed’s loan commitment, even when undrawn (if B of A drew down the loan, which it didn’t, it would pay a real interest rate). The loan commitment could be interpreted to be only $97 billion, so this comes to $194 million per year.

(b) $4 billion of preferred stock with an 8% dividend. That’s a dividend of $320 million per year; B of A can buy back the preferred stock by paying $4 billion.

(c) Warrants on $400 million of B of A stock. B of A was at $7.18 the day the bailout was announced and yesterday it closed at $17.61, so if Treasury had gotten an exercise price of $7.18, those warrants would be worth about $580 million now.

Sorry for quoting such a large slice, but you really need to get a feel for how atrociously the government is handling this.  James bends over backwards trying to find a charitable, or even good faith, understanding of how the Treasury could do this.  No dice.  A congressional staffer even tries to clarify at the expense of making the government seem more ridiculous:

A Congressional source tells me that the deal was never closed because the parties could never agree on which assets to include in the pool to be guaranteed…My source also says the $425 million payment is supposed to represent the benefit that Bank of America got from the guarantee over the last nine months. But it doesn’t. A guarantee is insurance. Let’s say you pay $1,000 for a one-year insurance policy for your house. At the end of the year, can you go to your insurance company and ask for the $1,000 back because your house didn’t burn down? If B of A and Treasury agreed on a price of $4 billion, then that’s the price; it has nothing to do with what happens later. So even if the deal was never closed, the “regulators” should have been asking for a lot more than $300-500 million as the value that Bank of America got from the relationship. As StatsGuy points out below, they could have gone to court for it; as even a first-year law student knows, an agreement doesn’t have to be written down and signed to be binding (and I assume at least the term sheet was signed by both parties).

Many people – the Serious People – have argued that the government needed to intervene in the crisis.  If the banks had all crumbled, we would be in a worse situation now, etc.

What that does not explain is why the market value of the equity needs to be any specific number.  If BAC shares were trading for $5.00 or $7.18 or $718, it would make no difference to the health of BAC, except in the limited sense that if BAC had an incredibly high market value it might be able to raise more capital in an equity issuance (even that is a small point – Goldman Sachs entered September 2008 with billions of dollars of market equity and was completely unable to raise funds without government intervention).

All we are debating in this settlement – as we were debating when Goldman ripped off the Treasury at Treasury’s request – is how to split up the pie of the current market value.  Should private shareholders be diluted in such a fashion as to represent the economic value delivered by the government?  Why not?

I will not send—I will not spend a single penny for the purpose of rewarding a single Wall Street executive, but I will do whatever it takes to help the small business that can’t pay its workers or the family that has saved and still can’t get a mortgage. That’s what this is about. It’s not about helping banks; it’s about helping people.

The forfeiture of the Treasury’s warrants has nothing to do with helping consumers, or for that matter, helping Bank of America.  Bank of America would make just as many loans if every share were held by the government or every share were held by Ken Lewis.  It is the private shareholders of Bank of America who benefit to the extent that the government does not press its claims; every dollar the government takes comes directly from them, every dollar the government gives goes directly to them.

It is absolutely sickening that the government will not fight tooth and nail to enforce the few crumbs it received from the generously negotiated deals it struck.  By any rights, the enormous contributions made by the taxpayer at a time no private shareholder was willing to invest would have delivered control of all the major banks.  Unfortunately, we don’t live in a world where the President is determined to receive fair value for taxpayer dollars.  But at the least I would expect him not simply to give them away, and here I have to admit that I am sorely disappointed in Barack Obama.