Friday, November 12, 2010

Turn On The Lights, Watch The Roaches Scatter, Part 39

With a heads up from John Carney (who I will grant is much better when he's sticking to financial news rather than punditry) we learn that the one thing that may pass the lame duck session easily is a bill to absolve the banks of Foreclosuregate.

Specifically, the plan seems to be to have Congress pass a law to shield MERS from most or all legal liability in the robo-signing fraud part of the equation:

If courts rule against MERS, the damage could be catastrophic. Here’s how the AP tallies up the potential damage:
Assuming each mortgage it tracks had been resold, and re-recorded, just once, MERS would have saved the industry $2.4 billion in recording costs, R.K. Arnold, the firm's chief executive officer, testified in 2009. It's not unusual for a mortgage to be resold a dozen times or more.
The California suit alone could cost MERS $60 billion to $120 billion in damages and penalties from unpaid recording fees.
The liabilities are astronomical because, according to laws in California and many other states, penalties between $5,000 and $10,000 can be imposed each time a recording fee went unpaid. Because the suits are filed as false claims, the law stipulates that the penalties can then be tripled.
Perhaps even more devastatingly, some critics say that sloppiness at MERS—which has just 40 full-time employees—may have botched chain of title for many mortgages. They say that MERS lacks standing to bring foreclosure actions, and the botched chain of title may cast doubts on whether anyone has clear enough ownership of some mortgages to foreclose on a defaulting borrower. The problems with MERS system led JPMorgan Chase CEO Jamie Dimon to stop using MERS for foreclosures in 2008. 

As you can see, the banks, which collectively own MERS, could conceivably owe tens of thousands of dollars for each robo-signing screw up.  And considering there may be hundreds of thousands if not millions of these, you're getting the picture as to just how much trouble the banks are really in.  And that's just tens of billions just in fines, let alone the punitive damages.

Catastrophic situation indeed.  So what's Congress going to do about it?

Supposedly let the banks walk away without a scratch.

Now it appears that Congress may attempt to prevent any MERS meltdown from occurring. MERS is owned by all the biggest banks, and they certainly do not want it to be sunk by huge fines. Investors in mortgage-backed securities also do not want to see the value of their bonds sink because of doubts about the ownership of the underlying mortgages. 

So it looks like the stage may be set for Congress to pass a bill that would limit MERS exposure on the recording fee issue and perhaps retroactively legitimate mortgage transfers conducted through MERS private database. 

Self-styled consumer advocate Neil Garfield says the legislation is already being drafted:
After years of negative judicial decisions about the use of a straw-man on mortgages, MERS was about to lose its existence as well as its credibility. But now all of that is set to change as Wall Street money is pouring into the coffers of those who are receptive (i.e., almost everyone in Congress). The legislation is already being drafted under the interstate commerce clause to ratify MERS and everything it did retroactively. It appears that the Obama administration is ready to pardon all the securitization deviants by signing this bill into law. This information is corroborated by several people who are in sensitive positions — persons who would be the first to know such proposals. Fortunately, there are some people in Washington who have a conscience and do not want to see this happen.
Garfield is overstating things a bit. In truth, the results of the legal challenges to MERS have been mixed. But it is very plausible that the banks might want to put to rest any ongoing uncertainty about the legality of MERS. I wouldn't be at all surprised if Congress manages to pass a bill that bails MERS out of its legal issues. 

And for once, I agree with Carney.  The cash pouring into Congressional coffers in order to pass this bill in the dead of night is overwhelming.  The last time this happened the press found out about it and Obama tossed the robo-signing bill back with a pocket veto.

It may be up to Obama again, but Wall Street is betting heavily that their post-Citizens United, post-election message has been heard on the Hill:  We own you.  Will Obama resist another bill like this again, or worse, will it be attached as a rider to a stopgap spending measure that has to pass?

Imagine the chaos if Obama is forced to sign a MERS shield bill in order to prevent a government shutdown.  Will he cave or stand strong?

We're about to find out.  Remember, in the lame duck session at least is would have to be Dems introducing this bill.

3 comments:

  1. "Remember, in the lame duck session at least is would have to be Dems introducing this bill."
    Is that supposed to make us feel better?

    ReplyDelete
  2. No, it's not.

    It's supposed to make us give a damn.

    ReplyDelete
  3. "Will he cave or stand strong?" Watching Obama piss away his presidency for two years, I's say it's safe to always bet on cave.

    ReplyDelete