So what happened? Three things. First, the banks created MERS to improve their profits. That took place in the later 1990s but it did not start to be widely used until the early 2000s. Second, starting in the 2002-2003 refi boom, originators and packagers started cutting corners on the carefully crafted procedures for notes (the borrower IOU) to be conveyed to the securitization trust. This change not only ran afoul of some legal requirements but also was a violation of the requirements of the pooling and servicing agreements, the contracts that govern the securitization. Third was the global financial crisis left a record number of foreclosures in its wake, far higher than ever contemplated when these deals were designed. Servicing highly delinquent portfolios is a money-losing proposition.
So the real reason that industry is having trouble with foreclosures and servicers are losing money has absolutely nothing to do with the reasons suggested by the Fed. Two of the three are due to the industry running roughshod over the law. MERS was vetted only on a Federal law level; no review was ever undertaken of whether it would work under the laws of all the states. It was brazenly assumed that if MERS was imposed, the states would roll. That proved to be a tad optimistic. The second reason, the abandonment of established procedures, is fraud pure and simple.
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