60 Minutes ran a story a few months ago on the foreclosure crisis.  It was a good story relating the effect of the crisis on Average Joe and also showing how the big, bailout banks are literally defrauding people out of their homes by employing 16-year old "robosigners" from Backwater, Georgia to sign legal documents (mortgage assignments and powers of attorney) that result in Average Joe losing his home.  In these phony documents the Backwater 16-year old falsely claims that he is a senior bank executive with international New York megabank JPMorgan Chase with the authority to transfer Average Joe's mortgage.  You can find the show here. 

But the 60 Minutes story only tells part of the sordid story, it unfortunately does not discuss the root cause the mess�"the Federal Reserve system and its artificially low interest rates beginning in the summer of 2001�"and predictably trots out establishment mouthpiece and FDIC Chairwoman Sheila Bair to float the idea of a 9/11-type, don't-ask-too-many-questions settlement fund that will allow the bailout banks to keep their hooks in Average Joe. 

THE REST OF THE STORY

The 60 Minutes piece unfortunately does not show what happens to those phony documents after they are prepared and how they are used to force Average Joe from his home. 

Banks take the phony documents and send them to dollar-chasing foreclosure mill law firms (today's know-not-what-they-do appraisers).  The banks direct the foreclosure mill law firms to record them with county recorders.  Recording the phony documents not only posts up the bank's legal position, it also gives the documents the veneer of credibility and makes the documents, invariably signed by people thousands of miles away, admissible in court.  See, e.g. Fed. R. Evid. 803(14), 803(15).   

The harlot attorneys then offer these official, county-recorder stamped phony documents as evidence to either harried, confused and compliant judges or clueless county sheriffs (the state actors in non-judicial foreclosure states) in support of the bank's often completely baseless claim that it is the rightful heir to Average Joe's home. 

Furthermore, the 60 Minutes story does not explain why JPMorgan Chase would turn to the Backwater 16-year old rather than direct its own actual, Vice President (or his duly designated minion in New York) to execute the mortgage transfer.  The truth is the JPMorgan Chase cannot prove that it "owns" Average Joe's loan (actually, the promissory note) and therefore has no right to take his home.  

To understand why the bank's claim is completely baseless you have to understand just a couple of basic legal principles relating to negotiable instruments (subset: promissory notes), secured real estate transactions (subset: mortgages or deeds of trust), and securitization. 

NOTES AND MORTGAGES

When you close on the purchase of your home, you sign two important documents.  You sign a promissory note which represents your legal obligation to pay.  You sign ONE promissory note.  You sign ONE promissory note because it is a negotiable instrument, payable "to the order of" the "lender" identified in the promissory note.  If you signed two promissory notes on a $300,000 loan from Countrywide, you could end up paying Countrywide (or one of its successors) $600,000.   Realizing $600,000 on a $300,000 loan would be a sweet deal for Countrywide; a deal that Countrywide (or your real lender) could achieve only by buying an AIG-written, Federal Reserve-funded derivative contract on your promissory note, not by making a photocopy of your original promissory note.

But seriously, at closing you also sign a Mortgage (or a Deed of Trust in Deed of Trust States). You may sign more than one Mortgage. You may sign more than one Mortgage because it does not represent a legal obligation to pay anything.   You could sign 50 Mortgages relating to your $300,000 Countrywide loan and it would not change your obligation.  A Mortgage is a security instrument.   It is security and security only.   Without a promissory note, a mortgage is nothing.  Nothing.   

You "give" or "grant" a mortgage to your original lender as security for the promise to pay as represented by the promissory note.  In negotiable instrument parlance, you "give/grant" the "mortgage" to the "holder" of your "promissory note."

If you question my bona fides in commenting on the important distinction between notes and mortgages, I know what I am talking abou.  I tried and won perhaps the first securitized mortgage lawsuit ever in the country in First National Bank of Elk River v. Independent Mortgage Services, 1996 WL 229236 (Minn. Ct. App. No. DX-95-1919). 

In that case a mortgage assignee (IMS) claimed the ownership of two mortgages relating to loans (promissory notes) held by my client, the First National Bank of Elk River (FNBER).  After a three-day trial where IMS was capably represented by a former partner of the international law firm Dorsey & Whitney, my client prevailed and the recorded mortgage assignments to IMS were voided.  My client prevailed not because of my great skill but because it had actual, physical custody of the promissory notes (payable to the order of my client) and had been "servicing" (receiving payments on) the loans for years notwithstanding the recorded assignment of mortgage.  The facts at trial showed that IMS rejected the loans as non-conforming to their securitization parameters and that the title company erroneously recorded the assignments; in short, IMS was attempting to shake down FNBER, much like the bailout banks are trying to shake down Average Joe.  

SECURITIZATION�"THE CAR THAT DOESN’T GO IN REVERSE

The "securitization" of a "mortgage loan" involves multiple parties but the most important parties and documents necessary for evaluating whether a bank has a right to foreclose on a mortgage are: 

(1) the Borrower (Average Joe);

(2) the Original Lender (Mike's Baitshop and Mortgages or Bailey Savings & Loan�"whoever is across the closing table from Joe);

(3) the Original Mortgagee (could be Mike's B&M, but could be anyone, including Fannie's Creature From the Black Lagoon, the mortgagee "nominee" MERS);

(4) the "Servicer" of the loan as identified in the PSA (usually a Bank or anyone with "servicer" in its name, the entity to whom Joe makes his payments);

(5) the mortgage loan "pooling and servicing agreement" (PSA) and the PSA Trust created by the PSA;

(6) the "Trustee" of the PSA Trust, according to the PSA this is the holder of Joe's promissory note and mortgage and the issuer of "(not really) mortgage backed securities" (MBS) sold to the the hapless "certificate holders" (e.g. PIMCO's Bill Gross).  

The PSA Servicer is the Chief Operating Officer and driver of the PSA.  Without the Servicer, the securitization car does not go.  The Servicer is the entity to whom Joe pays his "mortgage" (really his note, but you get it) every month.  When Joe's loan gets "sold" multiple times, the loan is not actually being sold, the servicing rights are.  The Servicer has no right, title or interest in either the promissory note or the mortgage.  Any right that the Servicer has to receive money is derived from the PSA. The PSA, not Joe's Note or Joe's Mortgage, gives the Servicer the right to take droplets of cash out of Joe's monthly payments before distributing the remainder to other PSA participants.  

The PSA Trustee and the sanctity of the PSA Trust are also vitally important to the validity of the PSA. The PSA promoters (the usual suspects, Goldman Sachs, Lehman Bros., Merrill, Deutchbank, Barclays, etc.) sold the MBS certificate holders (Bill Gross) on the idea that Joe's Note and Joe's Mortgage had already or would soon be placed in the vault-like PSA Trust, that Joe's Note would be properly endorsed by every person or entity that touched it after Joe signed it and it would sit in this locked-down PSA Trust with a green-eyeshade beancounter PSA Trustee diligently safekeeping it (along with Joe's Mortgage) for 30 years.  Further, the PSA promoters hired law firms like the Delaware law firm of Richards, Layton & Finger to persuade Mr. Gross that the PSA Trust, which has never had any money of its own and is 100 percent funded by Mr. Gross's investors and other MBS certificate holders, was the real owner of Joe's Note and Joe's Mortgage and further that the PSA Trust had purchased  or soon would purchase $500 million similar notes and mortgages in a "true sale" in accordance with FASB 140. 

I don't know about you, but when I go to Target to buy toilet paper I don’t have to hire a law firm and pay it $2000 an hour to persuade anyone that it is "true sale."   In my view there is no better evidence to support the proposition that a transaction is NOT a true sale than a $2000 an hour attorney's opinion that it is. 

The PSA promoters would object to the foregoing because toilet paper is not the same thing as a "complex" "financial instrument."  To that I respond, true, but digits on a spreadsheet and CUSIP numbers are not actual physical notes either.  Promissory notes are paper, toilet paper is paper.  My analogy is apt.  In accordance with: (1) FASB 140: (2) every PSA from the beginning of time to date;  and (3) FNBER v. IMS, if you don't got the note you got a big problem.  If you got the note, but can't show how you got the note (chain of title) or all you have is a photocopy of the note, you still got a big problem no matter how many Backwater 16-year olds you hire.  Having a photocopy of Lew Rockwell's $300,000 check payable to the order of Bill Butler doesn't get me very far at a bank or in court. 

COURTS THAT "GET IT"

More and more courts are agreeing that the banks "inside" the PSA do not have legal standing (they have no skin in the game and so cannot show the necessary "injury in fact"), are not "real parties in interest" (they cannot show that they followed the terms of the PSA or are otherwise "entitled to enforce" the note) and that there are real questions of whether any securitized mortgage can ever be properly perfected. 

The banks' weakness is exposed most often in bankruptcy courts because it is there that they have to show their cards and explain how they claim a right in the mortgage.  More and more courts are recognizing that, without proof of ownership of the underlying note, holding a mortgage means nothing.  SeeIn Re Aagard, No. 810-77338-reg (Bankr. E.D.N.Y.,  Feb. 10, 2011) (Judge Grossman slams MERS as lacking standing, working as both principal and agent in same transaction, and exposes MERS' alleged principal US Bank as unable to produce or provide evidence that it is in fact the holder of the note); In Re Vargas, No. 08-17036SB (Bankr. C.D. Cal., Sept. 30, 2008) (Judge Bufford correctly applied rules of evidence and held that MERS could not establish right to possession of the 83-year old Mr. Vargas' home through the testimony of a low-level employee who had no foundation to testify about the legal title to the original note); In Re Walker, Bankr. E.D. Cal. No. 10-21656-E-11 (May 20, 2010) (holding that neither MERS nor its alleged principal could show that they were "real parties in interest" because neither could provide any evidence of the whereabouts of, much less legal title to, the original note); Landmark v.Kesler, 216 P.2d 158 (Kan. 2009) (in this case the Kansas Supreme Court provides the most cogent state court analysis of the problem created by securitization�"the "splitting" of the note and the mortgage and the real party in interest and standing problems that the holder of the mortgage has when it cannot also show that it has clean and clear legal title to the note); U.S. Bank Nat'l Ass'n v. Ibanez, 941 NE 40 (Mass. 2011), (the Massachusetts Supreme Court denied two banks' attempts to "quiet title" following foreclosure because the banks' proffered evidence did not show ownership of the mortgages�"or for that matter, the notes�"prior to the Sheriff's sale); and Jackson v. MERS, 770 N.W.2d 489 (Minn. 2009) (this federal-gun-to-the-head�"certified question from federal court asking for state court blessing of its already decided ruling�"to the Minnesota Supreme Court is most notable for the courageous dissent of NFL Hall of Fame player and only popularly elected Justice Alan Page who opined that MERS should pound sand and obey state recording standards). 

THE ROAD AHEAD, STRATEGIC DEFAULTS AND THE REAL END OF THE FED

Someone asserting rights in a  mortgage must also be the "holder" of the note; that is they must show that they have the actual, physical note (as they promised Bill Gross) or they must otherwise show that they are "entitled to enforce" the note (according to centuries of law and the very clear mandates of the PSA).  If the note is not properly endorsed by everyone through whose hands it passed, this creates a real problem for the current "holder."  Hence the need for the Backwater16-year old.   But the Backwater 16-year old, by executing assignment of the mortgage, is only illustrating the real chain of title problems relating to the note. No note, no mortgage.  Remember FNBER v. IMS.

But it gets even worse for the banks.  That is because in order to have a valid mortgage, that mortgage must also be properly "perfected" (recorded) in the name of the original creditor. The original creditor in every securitized loan is actually the MBS certificate holder and all he is holding is an increasingly worthless piece of paper.  Further, everyone "inside" the PSA (Servicer, PSA Trustee, the various promoters) had no skin in the game.  They not only did not pay any "value" for Joe's Note and Joe's Mortgage, they collected fees in facilitating the loan from the MBS certificate holder to Joe.

A very large percentage of original, 2001-2008 mortgages are in the name of a loan originator (Mike's Baitshop and Mortgage) who actually received an origination fee via the PSA for facilitating the deal and gave nothing to Joe.  You can tell this when you look at the back of Joe's note and find that Mike's Baitshop and Mortgage endorsed the Joe's note in blank and "without recourse."  Without recourse for practical purposes means that Mike's sole contribution was to facilitate the deal by dragging Joe to the closing table and getting him to sign.

Another substantial percentage of mortgages are in the name of placeholder nominees that were created for the sole purpose of holding mortgages while servicing rights were transferred (see MERS).  A final percentage are in the name of mortgage loan wholesalers whose funding was in the form of multi-million dollar lines of credit provided by the PSA promoters, with the lines of credit settled at the end of each month.   None of these original "mortgagees" contributed anything of their own to Joe's loan.  They are all merely the final links in a Daisy Chain. 

As indicated by the cases above, perfection of a mortgage requires that it be recorded by the real "skin in the game" mortgagee at the time the mortgagee is also the owner/holder of the note.  If Mike's B&M endorsed Joe's Note in blank and "without recourse" on June 1, 2004, the PSA Servicer deposited Joe's Note in a "true sale" in PSA Trust on June 15, and the loan closer perfected the mortgage in Mike's name by recording it on June 30 (after Mike relinquished any claim in Joe's Note to the PSA Trustee on June 1), then the mortgage was recorded in the name of an entity that had no right, title or interest in the note at the time of perfection.  If, on the other hand, Mike's B&S never physically delivered Joe's note to the PSA Servicer or PSA Trustee but recorded it anyway, no one in the PSA can be "holders" of Joe's note and no one in the PSA has the "right to enforce" it.  These are just two examples of the myriad perfection and timing problems relating to securitized loans. 

Yes, you heard it all explained on www.LewRockwell.com first.  There are potentially 62 million unenforceable mortgages in the United States. Economic kharma?  I don't know.  But as my good friend who is now the retired chair of securitization at a major international law firm said as I explained the legal obstacles created when you try to put PSAs in reverse, "well I guess it just works until it doesn't."  

DID THE OCTOBER 2008 BAILOUT GIVE ME A "FREE HOUSE"?  

Unfortunately for the banks and the Fed, the story does not end there.  You see, there is the additional problem of derivatives and the October 2008 bailout.  A quick glance at a recent Federal Reserve balance sheet shows that it is holding over a trillion dollars in mortgage backed securities (Bill Gross may be off the hook).  Part of what happened in October 2008 is that the Federal Reserve paid AIG's derivative obligations to MBS certificate holders who had purchased AIG derivatives to guaranty Average Joe's payments.  (Imagine that Goldman Sachs/Hank Paulson as AIGs insured has 10,000 insurance contracts on Joe's home, some gas and match and his brother-in-law Ben Bernanke is the CEO of the insurer AIG/the Fed).  As part of that deal, Ben/the Fed apparently demanded subrogation from (the right to step in the shoes of) AIG and so got Hank's (Goldman Sachs and others') broken-down MBSs in return for satisfying AIGs obligations.  This is no different than an insurance claim on a totaled car. The Fed as the derivative insurer of last resort (stepping in the shoes of AIG) has the right to take the totaled car when it pays out on the policy.  Unfortunately for the Fed the totaled MBS car doesn't go in reverse.  

Want to really end the Fed?  Join a quiet title case demanding that your 2001-2008 securitized lender prove: (1) that it has physical possession of your original note; (2) that it is entitled to enforce your original note and can prove a clear chain of title to the note; and (3) that it is the rightful owner of a properly perfected mortgage. 

The Fed has shown that it is holding a destroyed car that does not go in reverse. 

THE ENDGAME: PLANTATION USA

Those of us fighting the banks began to see a disturbing trend starting about a year ago.   At the end of the foreclosure process, federal “government sponsored entities” (e.g. Fannie Mae and Freddie Mac) began showing up claiming title and seeking to evict homeowners from their homes.  The process works like this.   Average Joe had a securitized loan with Countrywide. Countrywide, which might as well have been run by the Gambino family with an expertise in “daisy chain” fraud, never followed the PSA and basically burned the original notes immediately after closing.  Countrywide goes belly up.  Bank of America (BOA) takes over Countrywide in perhaps the worst deal in the history of corporate America.  Bank of America realizes that it has acquired a big bag of dung and so sets up an entity called “BAC Home Loans LLP” whose general partner is another BOA entity. BOA uses BAC Home Loans LLP to conduct the foreclosure on Joe’s home.  But when it is time to kick Joe out of his home, all of a sudden Fannie Mae shows up in the eviction action.  When compelled to show its cards, Fannie will claim title to Joe’s house via a “quit claim deed” or an assignment of the Sheriff’s Certificate of sale.  Adding insult to injury, while Joe may have spend years trying to get BOA to “modify” his loan and begs BOA to pay them $1000 a month, BOA deeds Joe’s property to Fannie for nothing.  That right, nothing.  All county recorders require that a real estate purchaser claim how much they paid for the property to determine the tax value.  Fannie claims that it is exempt from transfer taxes because it paid nothing for Joe’s home and further falsely claims that it is exempt because it is a US government agency.  It isn’t. It is a government sponsored entity that is currently in conservatorship and run by the US government. 

It is apparent that the US government is so broke that it will do anything to pay its bills, including stealing Average Joe’s home. 

That’s change you can believe in. 

CONCLUSION

Ms. Bair made a comment at the end of the 60 Minutes piece that was very disturbing to me.  She said that she "was sure" that the banks could prove ownership in a trial.  Ms. Bair clearly is not a trial lawyer.  In fairly contested jury trials where the jury has full access to the facts, juries�"the same Average Joe people who were calling Ms. Bair and their congressmen in October 2008 telling them not to bail out the banks�"have a funny way of disagreeing with bossy, arrogant people.