"Produce the note"...and a new crash?

A while back, I discussed a novel way to forestall foreclosure: During the discovery phase, ask the banker to "produce the note" -- that is, ask for proof that the bank owns the mortgage. It has been said that half (maybe more) of all mortgage documentation has been lost in the chaos of the secondary mortgage market. The nice name for that chaos is "securitization."

I first heard about this idea from Rogert Ebert, of all people, who first learned about it from Michael Moore, of all people. A little Googling revealed that this trick does buy time, although not every time.

Now we have more from Pam Martens. (Tip of the hat to lambert.) The banks have tried to speed up the foreclosure process through some maneuvers that might be considered shady:

Because of the expense, time and paperwork it would take to record each of the assignments of the thousands of mortgages in each securitization, Wall Street firms decided to just issue blank mortgage assignments all along the channel of transfers, skipping the actual physical recording of the mortgage at the county registry of deeds.

Astonishingly, representatives for the trusts have been foreclosing on homes across the country, evicting the families, then auctioning the homes, without a proper paper trail on the mortgage assignments or proof that they had legal standing. In some cases, the courts have allowed the representatives to foreclose and evict despite their admission that the original mortgage note is lost.

Some judges have allowed these shennanigans -- and some judges are standing up to the banks. Here's what Judge Long of Massachusetts wrote roughly a week ago:

To accept the plaintiffs’ arguments is to allow them to take someone’s home without any demonstrable right to do so, based upon the assumption that they ultimately will be able to show that they have that right and the further assumption that potential bidders will be undeterred by the lack of a demonstrable legal foundation for the sale and will nonetheless bid full value in the expectation that that foundation will ultimately be produced, even if it takes a year or more. The law recognizes the troubling nature of these assumptions, the harm caused if those assumptions prove erroneous, and commands otherwise.

In other words: How can the house be sold if no-one can come up with any valid paperwork demonstrating ownership? "Produce the note" is thus more than a legal maneuver to buy time. It's serious business.

Because most mortgages (perhaps including the one for the building in which you're sitting right now) have seen more flipping than you'll find in a game of reversi, some Wall Street firms have set up an entity called Mortgage Electronic Registration Systems, or MERS, which sounds very official and very imposing. Basically, MERS acts as a straw man. As you might imagine, representatives from MERS have been showing up in lots of courtrooms. In the words of a lawyer named Timothy McCandless:

…all across the country, MERS now brings foreclosure proceedings in its own name -- even though it is not the financial party in interest.

So imposing is this opaque corporate wall, that in a ‘vast’ number of foreclosures, MERS actually succeeds in foreclosing without producing the original note -- the legal sine qua non of foreclosure -- much less documentation that could support predatory lending defenses.

I can only hope that an increasing number of judges will understand that MERS is a gimmick. MERS is like the Devil, who loses power the moment you start to laugh at him. When asked to produce the note, banks should do just that. No substitutions.

Question for the readers: Martens' piece goes on to argue that the securitization bubble is going to lead to another round of ultra-panic on Wall Street -- leading, in turn, to cries for further bailouts. Another call for a trillion-buck bailout will, I think, enrage the populace to the brink of rebellion.

However, I'm having a hard time understanding what Martens is saying. If you're still kind of bleary-eyed this morning, you may want to skim rapidly over the following:

Citigroup tells us that the Financial Accounting Standards Board (FASB) has issued a new rule, SFAS No. 166, and this is going to have a significant impact on Citigroup’s Consolidated Financial Statements “as the Company will lose sales treatment for certain assets previously sold to QSPEs [Qualifying Special Purpose Entities], as well as for certain future sales, and for certain transfers of portions of assets that do not meet the definition of participating interests. Just when might we expect this new land mine to go off? “SFAS 166 is effective for fiscal years that begin after November 15, 2009.” There’s more bad news. The FASB has also issued SFAS 167 and, long story short, more of those off balance sheet assets are going to move back onto Citi’s books.

Bottom line says Citi:

“… the cumulative effect of adopting these new accounting standards as of January 1, 2010, based on financial information as of June 30, 2009, would result in an estimated aggregate after-tax charge to Retained earnings of approximately $8.3 billion, reflecting the net effect of an overall pretax charge to Retained earnings (primarily relating to the establishment of loan loss reserves and the reversal of residual interests held) of approximately $13.3 billion and the recognition of related deferred tax assets amounting to approximately $5.0 billion….” [Emphasis in original.]

I’m trying to imagine how the American taxpayer is going to be asked to put more money into Citigroup as it continues to bleed into infinity.

Yeah, that question stumps my own imagination.

I was able to look up what a Special Purpose Entity is -- basically, it's an accounting trick put to novel use by the good folks at Enron. When you play the SPE game, you put all of your iffy assets into a fake subsidiary business so that you can tell shareholders and employees that everything is hunky-dory. But, dummy that I am, I'm not sure what the phrase "lose sales treatment" means.

Here's what the sitch looks like to me: Citigroup decided to make its balance sheet look rosier by moving crappy assets to an El Fako "entity." New rules forbid that kind of shell game. So now Citigroup -- and, presumably, other Wall Street behemoths -- will be forced to present a more realistic image to the world. And that image will be very ugly. Very, very ugly.

Am I right?

On a related front: Dakinikat informs us that the unemployment resulting from this recession is a whole lot worse than we thought. Compared to past recessions, a staggering 56% of the unemployed workforce is structural -- that is, these workers have been laid off permanently. Those jobs are gone forever. During the Reagan recession, that number was 45% at its highest point.