Capital Account with Lauren Lyster
Good afternoon and welcome to Capital Account. I’m Lauren Lyster here in Washington, DC. There are your headlines for Wednesday, May 30, 2012.
Right now at the World Bank here in Washington, there is reportedly a global housing finance conference going on. The theme is the importance of it. Now, it is focused on emerging markets but how about a lesson in how housing finance can go terribly awry as we’ve seen in the United States. We have the story that you probably have not heard behind robo-signing and mortgage-backed securities from a US government whistleblower that you haven’t seen on TV. That whistleblower was fired from the US Congressional Budget Office which is purported to be nonpartisan and objective, remember. Now, she believes it may have been because she gave an honest assessment of the issues facing the US economy that was at odds with what the CBO and perhaps its panel of economic advisers, including Morgan Stanley and Goldman Sachs, wanted to put out to the public.
So who are the CBO and Congress really serving? She’s here to tell us why we should all be asking that question. Remember that $25 billion mortgage settlement that was supposed to help struggling homeowners or victims of foreclosure abuse? Well, homeowners are suing in one state so the money doesn’t go to filling state coffers instead of going to homeowners. We’ll talk about it. Let’s go to today’s Capital Account.
Today we have a story you probably haven’t heard. It’s behind the mortgage mess and foreclosure fraud in the United States. Let me give you some background before we get to our guest. In the past century, real estate law and transactions in the US have been subject to state regulations with mortgage documents recorded at the county level. Now, this works relatively well in a traditional mortgage market like we had for most of American history. The bank that issues the mortgage keeps the loan on its books until maturity. However, this makes difficult, if not impossible, the type of financial engine nearing of mortgages we have seen in past years. I’m referring to, of course, the slicing and dicing, the repackaging and reselling of homes in mortgage-backed securities and collateralized debt obligations, for example, that we saw during the refinancing credit boom of the 2000s.
Now, one glaring reason for this is that every time a financial product containing mortgages is sold, various state laws would require that the sale of the mortgage be recorded in the local county office. This result in additional costs, of course, paperwork and perhaps most importantly, chain of title trails. Now, eager to work around these barriers, the financial industry, with all of its innovation, created an alternative system for recording the issuance, the sale and the redistribution of mortgages. That system is known as MERS. You probably have never heard of it, at least I hadn’t. It’s the Mortgage Electronic Registration Systems and it was founded in the mid-90s with the help of the big banks you see here, these are shareholders along with Fanny Mae and Freddy Mac. Now, MERS was created, this is straight from their website, by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper. According to MERS, this would also help reduce fraud and less fraud means lower cost for all borrowers.
Now, it may actually have accomplished the exact opposite of its stated objective. So let’s back up. What this did was effectively replaced the recording and the tracking of mortgage ownership and the paperwork at the county level with a privately-controlled system for tens of millions of mortgages. Once MERS was instituted, this is what happened. Lenders were still required to file initial paperwork at the county, but with two key distinctions from how things were done in the past. First, the paperwork did not need to be filed with the name of the lender. Instead of Bank of America or JP Morgan or whatever, it said MERS.
That was substituted in place of the mortgage issuers. Second and perhaps more importantly, any subsequent modification in terms or change in ownership of that mortgage, so what used to be paper at the county and everything was filed through the county; that instead would only be recorded now through MERS, through this database. Making it effectively a black box for the securitization industry and for the trillions of dollars in mortgages that was subsequently be rolled up, cut up, and sold in complex financial products to pension funds and other investors.
Trillions of dollars in credit protection, let me remind you, was written on these very mortgages to adding another layer of exposure to a financial system run amok.
Capital Account TV Exclusive Interview of CBO Mortgage Whistleblower Pt. 1
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