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WEST VIRGINIA AG JOINS GROWING LIST OF STATES FILING SUIT AGAINST LENDERS
Calif. groups seek moratorium on Countrywide foreclosures
Charlotte Business Journal
Two California community groups are urging the state’s attorney general to place a moratorium on mortgage foreclosures by Countrywide Financial Corp.
Countrywide is a division of Charlotte-based Bank of America Corp.
The California Reinvestment Coalition and the Greenlining Institute have asked Attorney General Jerry Brown to cease the foreclosure process on mortgages that match deceptive loans and practices cited in Brown’s recent lawsuit against Countrywide.
In June, Brown sued Countrywide and its top executives, accusing them of engaging in deceptive advertising and unfair competition. The suit contends the company pushed homeowners into mass-produced, risky loans in order to resell the mortgages on the secondary market.
State attorneys general in Florida and Illinois have filed similar suits against Countrywide, which is based in Calabasas, Calif.
As many as 900,000 Californians will face foreclosure in the next two and a half years, the community groups say.
Because of Countrywide’s dominance in the subprime mortgage market, 200,000 or more of those foreclosures could occur solely from Countrywide mortgages, they say.
In early July, BofA (NYSE:BAC) paid about $2.5 billion for Countrywide in a deal that made the bank the country’s largest mortgage lender.
NEW YORK — Bank of America Corp. revealed Thursday that it has received subpoenas and requests for information from various state and federal regulators regarding its sale of auction-rate securities.
In a filing with the Securities and Exchange Commission, the Charlotte, N.C.-based bank said subsidiaries Banc of America Investment Services Inc. and Banc of America Securities LLC are cooperating fully with the requests.
Auction-rate securities are bonds whose interest rates are set at periodic auctions, on the basis of bids submitted. The market collapsed in February amid turmoil in the credit markets.
Regulators have been investigating some banks’ involvement in the sale of the securities.
Earlier Thursday, Citigroup Inc. said it reached a settlement with the New York Attorney General and regulators to repurchase $7 billion in auction-rate securities and pay $100 million in fines.
Regulators claimed the investments were marketed as safe even when banks knew of liquidity risks during the downturn in the credit markets.
According to the SEC filing, four purported class action lawsuits have also been filed against Bank of America on behalf of purchasers of auction-rate securities. The cases relate to the sale of the investments between May 2003 and February 2008 and allege that the bank violated certain securities laws in regards to its marketing and sale of the securities.
The actions seek unspecified damages and attorneys’ fees.
A related individual federal action as well as several related Financial Industry Regulatory Authority arbitrations have also been filed, the bank said.
A Bank of America representative was not immediately available for comment.
Bank of America shares tumbled $1.93, or 5.8 percent, to close at $31.52. Shares are down about 19 percent for the year.
Connecticut Files Suit
Against Countrywide connecticut-countrywidelawsuit
August 7, 2008
Connecticut Attorney General Richard Blumenthal has sued Bank of America Corp.’s Countrywide Financial Corp. for allegedly deceptive lending practices.
Echoing the many other legal complaints against the mortgage lender, the Connecticut lawsuit alleges Countrywide engaged in several types of inappropriate lending behavior and made loans to consumers that were unaffordable or unsuitable for the borrower. The complaint, filed in state court in Hartford, alleges violations of Connecticut’s unfair trade practices and banking laws.
“Countrywide conned customers into loans that were clearly unaffordable and unsustainable, turning the American Dream of homeownership into a nightmare,” Mr. Blumenthal said.
The lawsuit seeks civil penalties of as much as $100,000 per violation of state banking laws and as much as $5,000 per violation of state consumer-protection laws; as well as disgorgement of any ill-gotten gains and an order compelling the company to cease the disputed practices.
Countrywide — which became a symbol of the loose lending standards that set the stage for the nation’s current mortgage crisis and housing-market implosion — was taken over by Bank of America in a $2.5 billion deal that closed last month.
“While we cannot comment on pending litigation, we will respond to the AG in due course,” a Bank of America spokeswoman said.The spokeswoman noted that since taking over Countrywide in July, Bank of America has been reviewing Countrywide’s operations and is “confident that our newly combined company will be recognized as a leader in responsible lending practices.”
The spokeswoman also said Bank of America has made several commitments to responsible lending practices, including modifying or working out at least $40 billion in troubled mortgage loans in the next two years to keep customers in their homes; pursuing a 10-year goal to lend and invest $1.5 trillion for community development beginning next year; and no longer originating subprime mortgages — a practice it stopped in 2001.
Write to Chad Bray at email@example.com
AG seeks foreclosure payback
Hundreds of Connecticut families who lost their homes to Countrywide through foreclosure cases could be getting their houses back, or enough money to buy a new one.Wednesday, Attorney General Richard Blumenthal, with the commissioners of the Department of Banking and Department of Consumer Protection, filed suit in State Superior Court, Hartford, against Countrywide Financial Corp., alleging multiple violations of consumer protection and banking laws.
“Our lawsuit seeks to invalidate loans that violated state law, allowing consumer to shed illegal, unreasonable fees and conditions that leave them at the precipice of foreclosure,” Blumenthal said in a press release. The state is also seeking fines of up to $100,000 per violation of state banking law and up to $5,000 per violation of state consumer protection laws.
In an interview Wednesday, Blumenthal said he would also attempt to return foreclosed homes, when possible, to people who lost them as a result of these unscrupulous loans.
According to the Connecticut Judicial Web site, Countrywide filed more than 400 foreclosure cases in the state, with most between 2006 and 2008. It is unclear how many houses have been taken from their owners.
If the houses have already been sold to other families, Blumenthal said, the state will seek enough compensation to enable those who unjustly lost their houses to get another one.
Blumenthal and the commissioners were not sure exactly how many Connecticut families are
involved, mainly because it’s expected to be a big number.”We’re talking hundreds, likely thousands, of families,” Blumenthal said.
With hundreds of Countrywide foreclosure cases still pending, Blumenthal said he has asked Bank of America, Countrywide’s parent company, to suspend all foreclosure activity until this issue can be resolved.
Bank o f America bought Countrywide in July through a stock swap valued at about $2.5 billion. Bank of America is not being sued.
Shares of Bank of America closed down 13 cents to $33.45 on the New York Stock Exchange.
In an e-mailed response to a request for comment, Bank of America stated it would not comment on pending litigation, but made assurances it is observing good lending practices.
“We are confident that our newly combined company will be recognized as a leader in responsible lending practices,” the bank’s e-mail said. “We are passionate about helping customers purchase a home with the right product for them and helping customers sustain homeownership.”
Blumenthal’s lawsuit said Countrywide encouraged consumers to take out loans it knew, or should have known, those borrowers couldn’t afford. It also claims the lender inflated borrowers’ incomes on financial paperwork to qualify them for loans. And, the suit said, it pulled a sort of bait and switch on borrowers, promising certain terms and conditions but then producing a set of different terms at the closing.
Banking Commissioner Howard Pitkin said the state’s case could suddenly leave a lot of people free of mortgages, as well. He said the state is requesting the court invalidate loans that were issued in violation of state law.
This lawsuit goes beyond subprime loans, which are generally those given to borrowers who have something negative on their credit history, Pitkin and Blumenthal said.
Blumenthal said it also involves people who took equity lines of credit on their houses.
Pitkin noted Countrywide was the state’s largest mortgage lender and one of the biggest sub-prime lenders during the housing market boom that began to fizzle last year in the face of rising loan defaults and falling real estate prices.
According to a June 26 report by the state’s Sub-Prime Mortgage Task Force, Countrywide had 2,412 sub-prime loans in the state.
Under its ownership, Bank of America said, Countrywide will not issue sub-prime loans and certain risky mortgage products that required little or no income documentation.
Consumer Protection Commissioner Jerry Farrell Jr. said his office continues to work with Blumenthal’s. This action, Farrell said, is limited only to Countrywide and no real estate agents or appraisers are involved.
The consumer protection department licenses those professions and Farrell said if any were involved in violations of the law, his office would take action.
But he said the vast majority of agents have acted professionally during the boom and subsequent downturn.
Countrywide is battling lawsuits from other states, including its home state of California.
It is also facing lawsuits from customers, including several in Connecticut.
New Canaan resident Patrick Ferrandino is suing Countrywide for prepayment penalty fees the lender charged Ferrandino when he paid off a $1.7 million loan. Ferrandino’s case is still pending in U.S. District Court of Connecticut, Bridgeport. It was originally filed in State Superior Court but was transferred to federal court.
Rob Varnon, who covers business, can be reached at 330-6216.
LIUNA’s New Report Says More Housing Market Problems Coming in 2010 and 2011
Many Subdivisions are Ticking Time Bombs Waiting for Interest Rate Resets Angry Homeowners Tell Corporate Home Builders to “Fix This Mess”
Laborers’ International Union of North America – LIUNA Dawn Page, 480-619-9263 firstname.lastname@example.org or Jacob Hay, 202-942-2285
Wall Street Report Tries to Dissect Financial Meltdown
A group of Wall Street executives released a report on Wednesday that outlined how the industry failed to foresee the financial meltdown of the last year and what companies can do to improve risk management.
The 172-page report, written by chief risk officers and senior executives at banks like Lehman Brothers, Merrill Lynch and Citigroup, also provides suggestions about technical issues at the same time as it offers a bit of a mea culpa.
“Virtually everybody was frankly slow in recognizing that we were on the cusp of a really draconian crisis,” said E. Gerald Corrigan, a managing director at Goldman Sachs and a chairman of the Counterparty Risk Management Policy Group III , which released the report.
Wall Street failed to anticipate how wide-reaching problems with mortgage bonds would spread into seemingly distant corners of the financial markets, the report said. Awash in easy money, banks doled out credit without sufficiently charging for the risk. Wall Street also created complex structures that masked connections between asset classes as well as compensation incentives that pushed traders to take risky steps for short-term gain. The industry’s failings have now translated into pain for the broader economy, the report said.
In many ways, the report acknowledged shortcomings that have already been raised by Wall Street’s critics.
Mr. Corrigan, a former president of the New York Federal Reserve, formed the group in April to develop a private-sector plan for minimizing future problems in the financial markets. He said in an interview that he hoped the report’s suggestions would be adopted industrywide within two years.
The report focuses on several issues, including accounting rules for bundles of mortgages, new tests for liquidity and disclosure of risks in complicated financial instruments. The findings have already been presented to Timothy F. Geithner, the president of the New York Federal Reserve.
In a cover letter to Treasury Secretary Henry M. Paulson Jr., the group attributed some of the crisis to human psychology.
“The root cause of financial market excesses on both the upside and the downside of the cycle is collective human behavior — unbridled optimism on the upside — and fear — bordering on panic — on the downside,” the letter said. The panic underlying the collapse of the investment bank Bear Stearns was clearly on the minds of executives as they worked on the report.
They outlined ways to reduce “counterparty risk,” the intricate links that connect financial companies and their trading partners. As Bear Stearns struggled in early March, investors feared that too many of those links would collapse if the bank folded — leading some Wall Street executives to say that Bear Stearns was not too-big-to-fail but rather too-interconnected-to-fail.
The report suggests that the industry create a way to close-out trades, should another major financial player face trouble. It also said the markets may be more “accident prone” because of new ways of doing business like Wall Street’s loan packaging, in which banks that originate loans to consumers then repackage them to sell to investors. And it listed the ability to make bets against credit — a trade that made some investors rich — as a possible cause of market instability.
Mr. Corrigan said a prior version of his group created rules that helped the financial system through recent turbulence. Under those rules, investors could no longer resell derivatives contracts without the permission of the party on the other side of the trade.
Now Mr. Corrigan is pushing for the industry to establish a central clearinghouse for derivatives. The clearing project is supported by the Federal Reserve, but many Wall Street firms are concerned that such a move could open their lucrative over-the-counter trading operations to competition from exchange companies.
Another hotspot in the report is the section about accounting for bundles of mortgages and other loans that have been packaged. Those have been kept off the balance sheet, and many in the industry think that rules that would put the bundles back on the books should apply only to the future. The report suggests putting loan packages from the past — which will force many banks to raise more capital from investors.
Mr. Corrigan said he knows the report presents a challenge, but that Wall Street firms need to adopt more of a spirit of “financial statesmanship.”
The publication of the report, he said, does not signal an end to the crisis.
“Since roughly March, we’ve kind of been bumping along the bottom,” he said. “That’s likely to continue for at least some period in the future.”
Countrywide Dogs Howling Over Bare Bones
The marriage between Bank of America (BAC) and Countrywide Financial (CFC) was supposed to stave off bankruptcy of Countrywide. It might not work out that way. Let’s put together some pieces starting with the Bloomberg report BNY Mellon, Citigroup, JPMorgan, Ambac in Court News.
Bank of New York Mellon Corp., the world’s largest custodian of financial assets, sued Bank of America Corp.’s Countrywide Financial Corp. seeking repayment of $2 billion in notes.
Countrywide failed to inform holders of its Series B floating rate convertible notes due in 2037 that its acquisition by Bank of America on July 1 gave holders the option to keep the notes or cash them in, lawyers for BNY Mellon said July 31 in a complaint filed in Delaware Chancery Court in Wilmington.
Countrywide was required to mail notices explaining the changes by July 16, according to the complaint. BNY Mellon filed the suit as trustee for the holders of the notes.
BNY Mellon is seeking a judicial declaration that Countrywide has defaulted on its obligations under the terms of the indenture. The company is also asking a judge to order Countrywide to immediately purchase the notes surrendered in cash equal to 100 percent of the principal amount plus accrued and unpaid interest.
Implications Of The Lawsuit
The Institutional Risk Analyst discusses the implications of the lawsuit in Is Countrywide Financial Headed for Bankruptcy?
It is remarkable but not surprising that it took this long for BNY Mellon (BK) to recognize BAC’s threatened default and to finally act in its role as fiduciary, but now that it has acted the other creditors of Countrywide, which is now a direct subsidiary of BAC, cannot remain indifferent.
Given the legal filing by BK, it is not impossible that another creditor of Countrywide will decide to file a claim or even an involuntary bankruptcy petition to protect their rights. As more legal claims are filed, a judge may even take notice of the diversity of claimants and suggest bankruptcy as a practical alternative. In the event, the FDIC and other regulators may be faced with the very situation they have tried to avoid via the marriage of BAC and Countrywide, namely the failure of a large depository.
The current situation is unchartered territory to put it mildly. Most of the lawyers and banking experts contacted by The IRA could never recall a situation where the parent of an insured depository institution was made subject to the authority of the bankruptcy court. Indeed, it appears that were a creditor of Countrywide to file an involuntary bankruptcy petition, the FDIC might be forced to intervene as receiver and take control of the bank unit. If a creditor, possibly even including BK, were to file an involuntary petition against Countrywide, BAC could stand to lose the book value of the investment in the bank subsidiary, roughly $7 billion at the end of March 2008.
“Typically the bond holders do not have an incentive to come together to create the demise of an issuer, but this situation is doing just that,” says Joseph Mason, Professor of Finance at Louisiana State University. “The FDIC wanted to avoid a large bank resolution early in the credit crisis, but the legal lose ends in the Countrywide situation may cause precisely that result.”
Dogs Howling Over Bare Bones
Bank of America thought it could strip the assets of Countrywide and toss the bones to the dogs. The lead dog, otherwise known as BNY Mellon is now howling. How long will it be before the rest of the pack starts howling?
And what is unique in this case is the pack of dogs (Countrywide bondholders), now have a vested interest in pushing Countrywide into bankruptcy so they can get some of the meat (Countrywide’s servicing unit), instead or worthless bones (Countrywide’s Debt).
Countrywide has about $38 billion in outstanding debt that the dogs are howling over.
Given that the merger was approve and closed on July 1, albeit under clouds of litigation, perhaps the dogs are barking up the wrong tree. Perhaps not.
The Institutional Risk Analyst concludes with “The possible issues and permutations of such scenarios are too numerous to address here, but suffice to say that the cross-guarantee provisions alone between insured depository institutions within the BAC group could create a legal nightmare if this situation does end up in a bankruptcy litigation. What will be the position of the Office of Thrift Supervision and the FDIC in the event? Just remember that we’re making this up as we go along. And please do stay tuned.”
Indeed, stay tuned. The final chapter on this story has likely not been written.
Mike “Mish” Shedlock
Mozilo defends cashing in Countrywide stock
WASHINGTON — Countrywide Financial Corp. founder Angelo R. Mozilo defended his fortuitous stock trades before a congressional panel Friday, denying that he had manipulated his trading plan to unload about $141 million in stock options before the company collapsed.
“You had good timing,” needled Rep. Henry A. Waxman (D-Beverly Hills), chairman of the House Committee on Oversight and Government Reform.
By making changes to his stock trading plan, Mozilo was able to vastly increase his stock sales before Countrywide shares plummeted during last year’s mortgage meltdown.
Mozilo, 69, maintained that the sales, which have drawn the scrutiny of federal investigators, were prompted by deadlines he faced to exercise stock options as well as the desire to diversify his assets in preparation for his retirement.
“The goal was to reduce my holdings because of my retirement . . . almost all my net worth was in Countrywide,” he said.
Mozilo also said that the timing of his stock sales was unrelated to a stock buyback program Countrywide had at the time. Such programs are sometimes used to shore up a company’s stock value, but Mozilo insisted that there “was absolutely no relationship between the buyback of stock and my sale of options.”
Mozilo’s remarks were made at a congressional hearing on the lofty compensation levels enjoyed by certain chief executives even as their companies were hammered by losses in the sub-prime mortgage market. He was joined at the witness table by Stanley O’Neal, former head of Merrill Lynch & Co., and Charles Prince, former head of Citigroup Inc., along with members of their boards.
O’Neal and Prince were pushed out after their firms suffered billions of dollars in losses tied to ill-fated mortgage securities. Mozilo remains at the helm of Countywide, the company he founded, although he is expected to leave after Bank of America Corp. completes its acquisition of the Calabasas-based lender this year.
The hearing was meant to showcase a chief complaint of corporate critics — that financial rewards for top executives often seem disconnected to the performance of their companies, with the current mortgage crisis offering a particularly stark case study.
Countrywide sold many of the sub-prime loans that are now going under, leading to increasing losses and its eventual agreement to be taken over by Bank of America. Merrill Lynch and Citigroup lost billions of dollars in their own dealings with mortgage-related securities that proved far riskier than advertised.
“The obvious question is this: How can a few executives do so well when their companies do so poorly?” Waxman asked. “Are the extraordinary compensation packages these CEOs received reasonable compensation? Or does the hundreds of millions of dollars they were given represent a complete disconnect with reality?”
Little was resolved Friday. The executives and board members politely defended the pay arrangements; Republicans on the panel argued that the mortgage crisis is rooted in problems more broad based than executive compensation.
“Punishing individual corporate executives with public floggings like this may be a politically satisfying ritual, like an island tribe sacrificing a virgin to a grumbling volcano,” said Rep. Thomas M. Davis III of Virginia, the panel’s senior Republican. “But in the end it won’t answer the questions that need to be answered about corporate responsibility and economic stability.”
Reports that O’Neal received $161 million after being pushed out of Merrill Lynch at a time of record-breaking losses attracted attention as well as stout defense. John Finnegan, chairman of Merrill Lynch’s compensation committee, explained that the $161 million was not intended as payment for the company’s troubles during 2007 but instead reflected benefits O’Neal had built up in the past, including stock and stock options, some dating to 2000 and earlier.
“All were amounts to which Mr. O’Neal was entitled,” Finnegan said.
Said O’Neal: “I received no bonus for 2007, no severance pay, no golden parachute.”
Lawmakers also questioned the $10-million bonus paid to Charles Prince, the former Citigroup leader who was pushed out after the firm also was hammered by losses related to the sub-prime debacle.
The bonus amount “was less than half the bonus he got in his previous year,” said Richard D. Parsons, the chairman of Time Warner Inc. and chairman of Citigroup’s compensation committee.
“I’m proud of my accomplishments,” said Prince, while also conceding he was “ultimately responsible” for the company’s actions, which included a misunderstanding of the risks of mortgage-backed securities.
But attention repeatedly returned to Mozilo, a self-made magnate who helped shape the modern mortgage business. Rep. Eleanor Holmes Norton (D-D.C.) pressed him on a recent committee disclosure that Countrywide had boosted his pay deal after a new consultant hired by the board sought to maximize what Mozilo could receive.
“None of this makes sense to me,” said Norton, alluding to e-mails on the matter that were obtained by the committee. “I want to know how it makes sense to you.”
Harley W. Snyder, the chairman of Countrywide’s compensation committee, said he disagreed with Norton’s interpretation of events, although he did not offer a detailed rebuttal.
During the hearing, Mozilo expressed regret for angry language he had used after being disappointed by a 2006 pay proposal, complaining in an e-mail that year about the “left wing anti business press and the envious leaders of unions.”
The pay proposal was “sharply different than what I expected,” Mozilo said Friday. “I regret the words I used. I tend to be an emotional individual.”
After four hours of give and take, legislators remained deeply divided on whether the executives and their pay packages helped cause the mortgage problems that now threaten the U.S. economy.
“This is a mess,” said Rep. Elijah E. Cummings (D-Md.), referring to executives “with golden parachutes drifting off into the golf field” at the same time that people “are losing their homes.”
But Rep. Darrell Issa (R-Vista) had a different view.
“Mr. chairman, I look forward to finding if something is wrong here,” he told Waxman. “So far you haven’t found it.”
Daily Development for Friday, September 16, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
MORTGAGES; FORECLOSURE; PROCEDURE; STANDING TO FORECLOSE: Florida trial court rules that MERS lacks status to foreclose as representative of lender even when MERS holds the note.
In re Mortgage Electronic Registrations Systems, Inc., Cir. Ct. Pinellas County, Fla., Walt Logan, Judge, 8/18/05) (Numerous case numbers)
As most readers of this list know, the Mortgage Electronic Registration System, MERS, was established about fifteen years ago to facilitate the rapid transfer of mortgages for the purpose of developing large pools to support securitization of mortgages. All parties participating in the MERS system (primarily mortgage bankers) agree to recognize as the owner of a note and mortgage that party shown on the MERS register. Although, originally, MERS functioned without recording and without taking possession of the note, more recently MERS has both recorded itself as the record owner of the mortgage at the time of the original loan funding, or shortly thereafter, and has also begun to take possession of a note endorsed in blank.
One assumes that the various parties who rely upon MERS as the registry of ownership of mortgage loans that they make sign agreements that make very plain the powers that MERS has to foreclose in their name. Use of MERS has become the standard for residential mortgages, over 95% of which are securitized, and for securitized commercial mortgage as well. But this Florida case puts at least MERS’ foreclosure arrangements very much at issue.
This order dismissed foreclosures in 28 pending foreclosures brought by MERS in Pinellas County. In each case, MERS was listed as a plaintiff or co-plaintiff seeking to collect on a note via mortgage foreclosure. In the end, the court dismissed all 28 cases for want of a proper party plaintiff.
In each case, MERS acknowledged that it was representing the interest of another corporate entity in the collection effort, and described its role as a “nominee” of the other corporate entity.
The court reviewed the files and stated that it found that the petition for foreclosure, which alleged that MERS “now owns and holds the mortgage note and mortgage” were not supported in the record. It acknowledged that MERS claimed that it was a “nominee” or the corporate entity that owned the note, but claimed that one corporation is not permitted to act for another in bringing a lawsuit. Rather, lawyers, and not corporations, represent other corporations in lawsuits.
In some of the files, there was an indication that the note was made out to a particular lender and no indication that it had been transferred to MERS or at least no “chain of transfer” linking the original lender to MERS. In another files, there was in fact a lost note affidavit filed indicated another owner of the note. In some files, in the view, MERS had inconsistently listed itself as a nominee of several different owners of the note, but again showed no chain of transfer from any of them.
MERS pointed out in court that it in fact had possession of each of the notes. It took the position that it was not necessary to show a chain of title of the note from the original payee to MERS, as it was in fact only a nominee. . It acknowledged that any foreclosure proceeds would flow through MERS to the real owner of the note as shown on MERS electronic records. At one point, the court was able to get counsel for MERS to admit that MERS wasn’t sure who the beneficial owner of the note was at that precise moment.
MERS nevertheless claimed that the notes had been endorsed in blank and that they essentially were bearer instruments under the UCC. Therefore, MERS physical possession of the notes should be enough to permit it to foreclose on the related mortgages, even though it acknowledged in court that it was not in fact the beneficial owner of them. There was confusing dialogue in the case, however, where the lawyers for MERS may have agreed that they didn’t have the note in court and were relying upon lost note affidavits.
The court made the point that the defendants in these cases might have counterclaims against the real beneficial owners but would be barred from bringing them because they didn’t know who those owners were, and furthermore they were not in court.
In the end, the court concluded that “beneficial interest to sue” cannot exist separately from other beneficial interests in the note. Since MERS claimed no other beneficial interest, its possession of the note endorsed in blank did not avail it. It commented that only positive legislation, and not contract, can establish a right to foreclose in someone other than the owner of a secured debt instrument:
“The MERS situation seems to have resulted from the establishment of the corporation and agreements with lenders without the participation of the Florida Legislature or the Supreme Court in its rule making role. The fact that the market might find it easier to operate with the real party in interest somewhere in the background of a foreclosure lawsuit is not a compelling reason to modify the traditional requirements of a party to establish status to bring litigation.”
Although the court refers to MERS as a “foreclosure agent” rather than a “servicing agent,” it appears that it would also exclude servicing agents from bringing foreclosure actions.
Comment 1: The author is informed that MERS views this case as an aberration, likely resulting from the failure of local counsel to use MERS standard form pleadings, and that it anticipates that it will not have a long standing problem in Florida or anywhere else.
Comment 2: The editor is not familiar enough with MERS practices to know whether MERS typically forecloses on behalf of all registered mortgage owners or only when these mortgages are at some defined step on the way to, or after, securitization. If others know, an inquiring mind would like the answer.
Comment 3: The presence of MERS has undoubtedly led to huge savings in mortgage securitization by the “private label” process. It likely is not as critical for FNMA or FHLMC when they engage in their traditional function of acquiring loans directly from originators, but likely FNMA and FHLMC have evolved quite a lot in the current market, so MERS may play a major role in their operations as well. Whether it is necessary for MERS to perform its function for it to be involved in a foreclosure is another question. On the other hand, are there any sensible reasons why it shouldn’t be able to carry out the foreclosure? The editor can’t think of any, nor can he think of any reason why legislation is necessary if MERS’ status as agent can be clearly made out by the contract and it produces the note.
Comment 4: It is difficult to make out all the details of the instant dispute, but it appears that in some cases there was no way to know who the true owner of the note is. This seems to be completely inconsistent with the basic notion of MERS that the owner is the party shown on MERS computer record. Consequently, it is hard to know why the owner of the note can’t be named. Therefore, the problem of counterclaims that the court mentions would disappear. The mortgagee is in the suit through its agent, MERS.