Speed Kills: Nevada’s Mortgage Mess, MERS, and Mayhem

Nevada Attorney General Catherine Cortez Masto (D) has filed suit against Lender Processing Services Inc. and subsidiaries for “violation for tens of thousands of violations stemming from a “pattern and practice” of “falsifying, forging and/or fraudulently executing foreclosure related documents, resulting in countless foreclosures that were predicated upon deficient documentation.”  [RGJ] That is a fair summary, but actually, there’s a bit more to it, the press release from the Attorney General’s office is more specific.  Lender Processing Services: [NVAttnyGen pdf]

1) Engaged in a pattern and practice of falsifying, forging and/or fraudulently
executing foreclosure related documents, resulting in countless foreclosures
that were predicated upon deficient documentation;
2) Required employees to execute and/or notarize up to 4,000 foreclosure
related documents every day;
3) Fraudulently notarized documents without ensuring that the notary did so in the presence of the person signing the document;
4) Implemented a widespread scheme to forge signatures on key documents, to ensure that volume and speed quotas were met;
5) Concealed the scope and severity of the document execution fraud by
misrepresenting that the problems were limited to clerical errors;
6) Improperly directed and/or controlled the work of foreclosure attorneys by imposing inappropriate and arbitrary deadlines that forced attorneys to churn through foreclosures at a rate that sacrificed accuracy for speed;
7) Improperly obstructed communication between foreclosure attorneys andtheir clients; and (8) Demanded a kickback/referral fee from foreclosure firms for each case referred to the firm by LPS and allowed this fee to be misrepresented as “attorney’s fees” on invoices passed on to Nevada consumers and/or submitted to Nevada courts.

The list is more or less the definition of a “foreclosure factory.”  It’s also more or less the logical outcome of what happens when the demand for mortgages to plow into the “structured finance” maw creates a demand for close-to-the-speed-of-light documentation, and the substitution of things like MERS for good old fashioned filings with the appropriate county officials.  There should have been some stop signs along the way.

The roads through the subdivisions and financing establishments should have been posted with STOP signs for (1) Stop and think before you yield to the temptation to believe that investing in residential real estate is like investing in the stock market.  To open a margin account at your local brokerage requires a deposit which is at least $2,000 and can be higher depending on the margin agreement signed.  Your initial margin will be 50% — meaning you have to cover at least 50% of the amount you are borrowing.   The SEC goes a step further, describing the “maintenance requirement.”

“The equity in your account is the value of your securities less how much you owe to your brokerage firm. The rules require you to have at least 25 percent of the total market value of the securities in your margin account at all times. The 25 percent is called the “maintenance requirement.” In fact, many brokerage firms have higher maintenance requirements, typically between 30 to 40 percent, and sometimes higher depending on the type of stock purchased.”  [SEC](emphasis added)

Therefore, if you are investing in the stock market, and borrowing funds to purchase stocks, then the lowest percentage you’d have to cover is at least  the 25% maintenance requirement.  Now, compare that to the No-Down-Payment Adjustable Rate Mortgage business.

There isn’t an investment advising brokerage in the country who would agree to a 0% deposit, 0% reserve, no cover margin agreement with any client, so why would a “flipper,” or even someone investing in real estate as rental property, ever believe that investing in no-down payment ARMs was a sound idea?  Just as you’d have Zero in your margin account, you have Zero equity in your house.   Of course, surprise – surprise, it’s much easier to walk away from a purchase in which you have Zero invested.  (Hint: That’s why the retail broker makes you sign that margin agreement.)

The happy home flipper may have thought that residential property was an investment in which there was no deposit required to open “the account,” no “initial margin,” and nothing required but to keep up the payments until the property could be sold.   There are countless home restoration and resale specialists in this country who have voluminous experience in the resale housing market — unfortunately, the siren songs of the Get Rich Quick Bunch drowned out ages of wisdom achieved through experience — precisely like the Song Of The Electronic Documentation Siren who told financiers that there was an easier, faster, way to record property transactions rather than to deal with the stodgy clerks in the Recorder’s office.

Just because my speedometer says my vehicle can reach 180 mph, doesn’t mean I should drive at that speed.  Equally, just because mortgages and related property transactions could be electronically filed with MERS at lightning speed doesn’t mean that was the best way to properly document ownership.  There should have been a second STOP sign.

A stop sign that required mortgage handlers to (2) Stop and think that perhaps the MERS system was convenient for “structured finance,” it wasn’t the way to properly account for real estate transactions.  This should have been something to consider before the Clerk of Duval County, Florida filed suit against MERScorp, saying:

“The MERS System is not a legal system of record or a replacement for public land records. No interests are transferred on the system—they are only tracked,” Smith, Merscorp vice president of corporate communications, wrote in a response to emailed questions. “MERS does not have or maintain any document recording system, public or private, and does not do anything to compete with or supplant the public records for land located in the County records.” [NatlMortgageNews]

Third, yet another STOP sign should have popped up to advise the promoters of structured finance to (3) Stop and think about the underlying value of real estate transactions in which altogether too many buyers had too little actual ownership in the properties, which were tracked instead of recorded properly, and which because of the paucity of real ownership stakes and real documentation could easily become “toxic.”

Not to put too fine a point to it, but the short term focus of the practitioners of Financialism combined with the short term focus of those who came to believe that real estate was “just like any other investment,” was in itself a toxic brew.

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