You may recall that a couple of weeks ago I wrote a post about a class action lawsuit filed against JP Morgan Chase by the State of California for it’s bad foreclosure practices in Federal bankruptcy courts. Today the NY Attorney General Eric Schneiderman has decided to take on MERS, the electronic recordation system which has served the banks as a proxy for traditional mortgage recordation process involving county land offices:

The lawsuit is over the banks’ use of MERS, the Mortgage Electronic Registration System the industry created in the mid-1990s to track the ownership and servicing of residential mortgage loans.

Schneiderman claims the system is plagued by inaccuracies. The lawsuit also names MERS and its parent as defendants.

“The mortgage industry created MERS to allow financial institutions to evade county recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages en masse,” Schneiderman said.

Schneiderman’s lawsuit claims that banks saved $2 billion in recording fees by using MERS.

The suit also said the use of MERS resulted in the filing of improper NY foreclosures and created “confusion and uncertainty” over property ownership interests.

NY joins a host of entities which have sued MERS (including our own Dallas County.) Yet I believe it’s safe to say that most people still are not familiar with MERS, or the role it played in greasing the wheels for the orgy of securitization that helped to blow up the economy when the housing bubble began to burst in 2006. Pro Public has a pretty good background it published last year when stories about MERS popped up in the NY Times and the Washington Post:

MERS is a confidential electronic registry that banks helped create in 1997 in order to keep track of mortgage paperwork. As we noted in our primer on the foreclosure scandal players, MERS saved the banks time and money by providing a private, electronic alternative to the public system used by local government recorders. By using the MERS registry, they largely avoided the recording fees.

Local government offices play important roles in recording changes in land ownership, the same way they record births, marriages, and other essential records. Having a public entity holding onto original documents is handy, after all—for instance, if you can’t find your marriage license, you can request a copy from the county you were married in. Or if you need those documents authenticated, the government can help do that too.

But for Fannie Mae, Freddie Mac and the banks, the local government recorders weren’t speedy enough—especially as the mortgage industry moved into the business of securitization, or bundling and selling mortgages. To facilitate securitization, they created MERS, a private database that relied on its members to enter data about mortgage transfers on their own.

MERS is an odd beast. One law professor likens it to the Roman two-faced God Janus:

No deity better symbolizes what financiers hoped to create when they founded the Mortgage Electronic Registration System (MERS). MERS sits as a dichotomous, enigmatic gatekeeper on the vestibule of our nation’s complex and turbulent mortgage finance industry.  Financiers invoked MERS’s name at the beginning of millions of subprime and exotic mortgage loan transactions and again invoke its name as they attempt to terminate so many of these loans through foreclosure.  Like Janus, MERS is two-faced: impenetrably claiming to both own mortgages and act as an agent for others who also claim ownership

The legal theory behind MERS rests on the intricacies of property and agency law, but in essence MERS positions itself as the “owner” of a mortgage or a deed of trust for the purposes of filing in local land offices. Then, hidden away in offices and servers, the banks which hold the beneficial interest in the note and the deed of trust or mortgage (meaning, the right to be paid) quietly go about transferring deeds and notes amongst themselves as they see fit, indicating the transfer by merely updating MERS’ records and thus avoiding the need to record any of these transfer of interest as required by state law. Not only does this allow banks and other deed and mortgage holders to avoid recordation fees as mentioned above, it has allowed them to escape transparency regarding their ownership interest (at least until they or their proxy MERS is forced to establish standing in court.)

Avoiding state recordation laws out of convenience is bad enough, but it might be excusable if in fact MERS could claim to be able to establish definitive ownership of a beneficial interest in a piece of property. But they can’t. As explained in both the Pro Publica article and the law review article I cite above, MERS has a horrendous track record. Bank members are not legally required to keep MERS electronic records updated, MERS barely asks them too, and really has  no incentive to do so until they’re lawyers find themselves in court trying to explain why their client has standing to foreclose on a mortgage.

The very legality of MERS remains an open question. You may recall from my earlier post that the law firm Covington & Burling drafted a legal memo in 2004 that MERS has cited to establish the legality of their system of electronic recordation. That memo addresses the legality of MERS in a very limited manner, and hardly establishes that MERS would be in accordance with recordation statutes of the 50 states. The fact of the matter is that MERS skirts the requirements of property law that has developed over a period of centuries, starting in the United Kingdom and continuing here. Courts have begun addressing the matter; MERS has lost some cases, and won others (they have a worse track record in Federal bankruptcy courts than they do in state courts.) But without question, it will be years before enough courts have weighed in to say in what manner MERS is permitted to operate in each state, and many more years after that before we might see substantial reform in this process.

Judges are of course required to interpret state and Federal law to the best of their abilities, but the big picture is simply this: MERS was established by large banks to facilitate the mortgage securitization process and to avoid the fees and inconvenience that is typically associated with the recordation process. In doing so it has upended centuries of property law, and done so in service of a cause-mass mortgage securitization-that itself proved to be the downfall of our economy. The only reason MERS has survived as long as it has is because most foreclosures are done by rote by both the foreclosing party and the judge signing off on the foreclosure, and the number of homeowners able to contest MERS (or the authority of banks in general) are a tiny, tiny minority. Were these parties each represented by counsel prepared to challenge the standing of MERS to bring suit to foreclose, this system would’ve cracked like an egg by now. Effective lobbying and the sheer scale of the foreclosure mess serve to keep MERS out of the crosshairs of state and Federal legislators, for now at least.

By now you’re almost certainly aware of the accusations of widespread fraud leveled against banks and mortgage servicers entailing the falsification of affidavits, assignments, loan records, etc., in their efforts to speed up the process of foreclosure as mortgage defaults have soared since the housing bubble burst. In the latest round, JP Morgan Chase faces a class action lawsuit in California state court for their alleged bad behavior in foreclosure actions in Federal bankruptcy courts (via CompliancEX):

 Lead plaintiff Ernest Michael Bakenie claims that Chase’s “pattern and practice of playing ‘hide-and-seek’ with debtors, judges and other bankruptcy players” bore rich fruit: that Chase secured motions for relief of stay and proofs of claim in 95 percent of its cases.
“Through the use of fabricated assignments, endorsements and affidavits that purport to transfer deeds of trust, notes and the rights to all monies due under the terms of tens of thousands of non-negotiable promissory notes (the ‘MLNs’); Chase has demonstrated a pattern and practice of playing ‘hide-and-seek’ with debtors, judges and other bankruptcy players,” the complaint states.
“Chase intentionally conceals the identity of the true parties in interest entitled to enforce the tens of tens of thousands of residential non-negotiable promissory notes (the ‘MLNs’) for its own financial benefit, at the expense of the class and to the detriment of the integrity of the bankruptcy system.”

The suit goes on to allege that Chase used a network of attorneys to file more than 7,000 motions for relief (the process by which the stay is lifted against secured property so that foreclosure can proceed during a pending bankruptcy) and that attorneys were rewarded for how quickly they could get orders lifting the stay.

At issue in nearly all of these cases is the question of whether the foreclosing party, be it bank, servicer or MERS, the mortgage recording service, actually has legal title to the property and thus the right to foreclose. Explaining this issue requires more time or space than I have here, but if you’re looking for a pretty good explanation of the basics, the text of the recent complaint filed by Dallas County against MERS is a fairly decent primer.

Many of the allegations of bad behavior are in the context of civil court. Although there have been numerous individual decisions against the banks and servicers in bankruptcy court, this is the first case I’m aware of that alleges bad behavior across thousands of cases in multiple bankruptcy court districts. Bankruptcy adds another layer to it; in the civil cases, a variety of state laws apply that may or may not make such behavior criminal in nature. But in at least some of these cases, JP Morgan Chase would have relied on documents filed alongside a proof of claim in a bankruptcy case, and Federal bankruptcy law provides for criminal penalties for the filing of a false or fraudulent claim.  Filing false documents that purport to give you standing to foreclose such as a falsified mortgage assignment or note, is without question what is contemplated by this admonition. Yet somehow, despite that fact that it has been demonstrated that banks and servicers knowingly filed false documents, to my knowledge no bank or servicer has been charged with fraud for filing false documents attendant to a bankruptcy proof of claim. If you’re wondering why that’s so unusual, I suggest you try filing a fraudalent claim in someone’s bankruptcy case and see how long it takes before the FBI is giving you a phone call.

So why have banks for the most part (with rare exceptions) avoided criminal penalties, let alone some sort of Federal investigation given how widespread allegations of fraud are?  Well, on that topic:

 U.S. Attorney General Eric Holder and Lanny Breuer, head of the Justice Department’s criminal division, were partners for years at a Washington law firm that represented a Who’s Who of big banks and other companies at the center of alleged foreclosure fraud, a Reuters inquiry shows.

The firm, Covington & Burling, is one of Washington’s biggest white shoe law firms. Law professors and other federal ethics experts said that federal conflict of interest rules required Holder and Breuer to recuse themselves from any Justice Department decisions relating to law firm clients they personally had done work for.

Both the Justice Department and Covington declined to say if either official had personally worked on matters for the big mortgage industry clients. Justice Department spokeswoman Tracy Schmaler said Holder and Breuer had complied fully with conflict of interest regulations, but she declined to say if they had recused themselves from any matters related to the former clients.

Reuters reported in December that under Holder and Breuer, the Justice Department hasn’t brought any criminal cases against big banks or other companies involved in mortgage servicing, even though copious evidence has surfaced of apparent criminal violations in foreclosure cases.

The evidence, including records from federal and state courts and local clerks’ offices around the country, shows widespread forgery, perjury, obstruction of justice, and illegal foreclosures on the homes of thousands of active-duty military personnel.

A particular concern by those pressing for an investigation is Covington’s involvement with Virginia-based MERS Corp, which runs a vast computerized registry of mortgages. Little known before the mortgage crisis hit, MERS, which stands for Mortgage Electronic Registration Systems, has been at the center of complaints about false or erroneous mortgage documents.

Court records show that Covington, in the late 1990s, provided legal opinion letters needed to create MERS on behalf of Fannie Mae, Freddie Mac, Bank of America, JP Morgan Chase and several other large banks. It was meant to speed up registration and transfers of mortgages. By 2010, MERS claimed to own about half of all mortgages in the U.S. — roughly 60 million loans.

***

It isn’t known to what extent if any Covington has continued to represent the banks and other mortgage firms since Holder and Breuer left. Covington declined to respond to questions from Reuters. A Covington spokeswoman said the firm had no comment.

Several lawyers for homeowners have said that even if Holder and Breuer haven’t violated any ethics rules, their ties to Covington create an impression of bias toward the firms’ clients, especially in the absence of any prosecutions by the Justice Department.

I don’t have any reason to believe that Holder or Breuer have purposefully declined to investigate their former employers clients.  And if they recused themselves, then certainly they’ve done nothing improper either legally or ethically. But the government recruiting from powerful firms like Covington, whose clients could easily find themselves being eyed keenly by the DOJ, necessarily creates a conflict of interest. The worst of it though is not where government employees, from Holder down, have come from. It’s where they might go once they’ve completed their government service.  Without question our government has become something of a revolving door for some of the top enforcement officials in America. In the SECs case this coziness with the Wall Street titans whom they are charged with overseeing is unseemly, corrupt and should be criminal. In the DOJ it’s merely embarrassing. In all regards, it gives one the very strong impression that our government cannot be trusted to investigate crimes committed by people they once worked with, and with whom they might work again. So instead we plug along, one small civil suit after another, with only low-level executives facing the threat of jail time.  The banks and the servicers they employs certainly would prefer to stop spending tens or hundreds of millions of dollars to settle enforcement actions and lawsuits against them, but perhaps that’s less costly than reforming their procedures when for all practical purposes they enjoy immunity from criminal law. The same of course cannot be said for the little people like us.

Congress passed, and President Obama has signed into law, a four-year extension of some controversial non-permanent provisions in the PATRIOT Act including roving wiretaps (authorized for a person rather than a communications line or device ) of court-ordered searches of business records and of surveillance of non-American “lone wolf” suspects without confirmed ties to terrorist groups. Sen. Rand Paul held up the bill until he was given a vote on an amendment that would have restricted powers to obtain gun records in terrorist investigations. It was defeated 85-10 after lawmakers received a letter from the National Rifle Association stating that it was not taking a position on the measure.

After narrowly defeating a measure to attach a timetable for withdrawing troops from Afghanistan, the House of Representatives passed a $690 billion defense bill. President Obama has threatened to veto it over its languaging expanding the president’s war authority beyond going after those behind the 9/11 attacks, preventing any funds from being used to transfer detainees at Guantanamo Bay, undermining the repeal of “don’t ask, don’t tell,” and reaffirming the Defense of Marriage Act. The bill also bars any U.S. ground forces from Libya, but the House is ignoring the Obama administration’s call for a vote on authorizing our current involvement there.

House Republicans also continued their anti-abortion crusade by banning health centers from using federal money to train doctors on how to perform abortions. But at least they finally made time for that jobs agenda.

At the same time, most Senate Republicans decided to follow their counterparts off a cliff by voting in favor of the Ryan plan to turn Medicare into a voucher system. Among the Republicans that voted against it were Sens. Scott Brown and Olympia Snowe who face reelection next year. This helps them both in the general, but Snowe in particular faces a tea party challenge and this adds fuels to the fire. Sen. Richard Lugar, also facing a uphill primary battle, voted in favor, hopefully giving Democrats an opening if he makes it out. Sens. Susan Collins, Lisa Murkowski, and Rand Paul also voted against it, though in Paul’s case, it was because he didn’t think he went far enough. His own budget plan, along with Sen. Pat Toomey’s and the White House proposal, also failed.

And before leaving for Memorial weekend, Senate Republicans also set up a “pro forma” session to block President Obama from recess appointing Elizabeth Warren to the Consumer Financial Protection Bureau.

Democrat Kathy Hochul has beaten Republican Jane Corwin in a special election for New York’s 26th congressional district, vacated by Republican Chris Lee when a shirtles craigliss ad he put up was discovered. This is particularly notable because this is a district with a 30,000 Republican vote advantage and has only elected a Democrat four times since the Civil War. While tea party candidate Jack Davis played somewhat of a spoiler role, his initial support dwindled in the past few weeks as Hochul, considered a good campaigner, successfully used Corwin’s support for the Ryan medicare plan to take the lead. And, as of this writing, Hochul won with 48% of the vote – twice what the Democratic candidate got in 2010, as Corwin did substantially worse in several Republican strongholds in the district than normal.

Other the past few weeks, the national spotlight fell on this district with groups like Karl Rove’s American Crossroads putting in loads of money to save this seat. One wants to be cautious in reading too much into one special election, but it is clear that the unpopularity of the Ryan medicare plan (which all but four House Republicans voted for and Majority Leader Harry Reid will soon force Senate Republicans to vote on) played a significant role and will likely give many other Republicans reason to worry about their political prospects next year. Democrats need to win a net 25 seats to retake control of the House and Kathy Hochul’s victory tonight may give them the roadmap to do so.

The United States Senate continues to be the place where bills die as all but two Republicans and three Democrats voted against ending subsidies for oil and gas companies (Democrats returned the favor by rejecting a Republican bill to expand offshore oil drilling). Senate Republicans then blocked confirmation of Goodwin Liu, who was nominated well over a year ago by President Obama for the 9th Circuit Court of Appeals. Many showed extraordinary hypocrisy after having previously called judicial nominee filibusters unconstitutional.

The Texas legislature did bring some reason to be cautiously optimistic: the campus-carry and the “sanctuary cities” bills both met roadblocks, though it is not certain they are completely dead just yet. And the House has agreed to the smaller education cuts in the Senate budget, but time is running out. A special session on congressional redistrcting already appears likely. At least they cleared the way for “noodling” though…

Following off of Nat-Wu’s excellent post about Irving, here’s some information from Texas Tribune on what happened around the state this weekend:

Polls closed Saturday evening in municipal elections across the state. Runoffs will decide the mayoral races in Dallas, between David Kunkle and Mike Rawlings , and Fort Worth, between Betsy Price and Jim Lane. Mayor Julián Castro sailed to re-election in San Antonio with 82 percent of the vote. In Amarillo, Paul Harpole claimed victory in an eclectic, 11-candidate field that included a controversial street preacher and the first transgender woman to run in a city race. And in Austin, a runoff will decide the city’s highest-profile city council race.

And in my town of Denton, I am pleased to report that Kevin Roden handily won in our open seat contest in district 1. I strongly supported his campaign and I am glad he will be my new councilman. In the three other council races, incumbents reigned victorious. Next year we’ll have contests for our two at-large council seats and the mayoral race (it will be interesting to see what Mayor Mark Burroughs does as their are some rumors that he may be running for Congress, though I personally find it more likely he’ll run for a third and final term unless Rep. Michael Burgess retires).

The Wisconsin Democrat is leaving the Senate, adding another competitive open-seat race to the 2012 elections:

Democratic strategists insisted that they will field a top-tier candidate in the open seat, noting that the fight between Gov. Scott Walker (R) and national unions over collective bargaining in the state earlier this year has energized the party.

Reps. Ron Kind, Tammy Baldwin and Steve Kagen as well as former Sen. Russ Feingold and former Rep. Tom Barrett, who ran lost to Walker last November, are mentioned.

National Republican Senatorial Committee spokesman Brian Walsh said in a statement that Kohl’s retirement “immediately presents another key opportunity for Senate Republicans next year.”

For Republicans, the obvious name is Rep. Paul Ryan, the architect of House Republicans’ controversial budget plan. It’s not clear whether Ryan wants to leave his perch as chairman of the House Budget Commtitee to make a statewide run, however.

Other GOP names being mentioned include state Attorney General J.B. Van Hollen, wealthy businessman Tim Michels and former Rep. Mark Neumann.

Senator Kohl says he believes that overreach by Republicans in the state on collective bargaining rights for public unions (which may result in some state senators being recalled this summer) will help Dems keep the seat, which is a must if they want to keep control.

As far as candidates go, it’ll be interesting to see if liberal stalwart Russ Feingold gets in (his name has also been mentioned as a possible challenger to Gov. Scott Walker, should he be recalled next year). And Rep. Paul Ryan? Considering how thoroughly unpopular his plan to privatize Medicare is, I’d love to see him run as well!

UPDATE: Ryan’s out, and former Gov. Tommy Thompson is likely in.

It’s getting ugly. With their window of oppurtunity closing, Republicans in state legislature are flattening rules and traditions to pass measures most coveted by conservatives. Over the weekend, the house passed a “loser pays” tort reform legislation that will further hamper the ability of average citizens to bring suit in court. After the Senate adopted a conference report, the “voter ID” bill appears to be on its way to the governor’s desk (though their is indication that the Justice Department wants to look into it). “Campus carry” gun legislation was also tucked in as an amendment to an unrelated bill, giving it renewed chance of passing. And as President Obama visits El Paso today to deliver a speech on immigration reform (Gov. Perry has characteristically decided not to welcome him to our state), a bill targeting so-called “sanctuary cities” was rammed through.

None of this is surpsing, of course. Republicans won a supermajority after the last elections and were going to use that power to pass whatever they can – much to the detriment of the rest of us.

Rep. Joe Donnelly is set to announce Monday that he is running for Republican Sen. Richard Lugar’s seat in 2012. This is important because, next to Maine Senator Olympia Snowe, Lugar is a big target for a primary challenge by the Tea Party. Should he lose, the seat would be more competitive and a strong candidate could lead to a pickup. Donnelly had been elected to Congress three times, though his district was being altered to make it more Republican, probably making the decision to run for Senate easier.

Prior to his retirement last year, Evan Bayh had been a Democrat elected to the Senate from Indiana and President Obama won the state in a surprise victory in 2008. It’ll be a steeper climb this time, but Republicans won’t have as easy a time as they did with the 2010 Senate race (where Republican Dan Coats beat former Rep. Brad Ellsworth by 20 points) either. In any case, this race just got more interesting to watch.

Republicans in the U.S. House of Representatives have passed a bill that shows their priorities:

H.R. 3, also known as the “No Taxpayer Funding for Abortions Act,” would go beyond making the Hyde Amendment, which has already banned federally-funded abortions for the past 30 years, a permanent federal law. The legislation, sponsored by Reps. Chris Smith (R-N.J.) and House Speaker John Boehner (R-Ohio), would also enact strict procedural requirements for private insurance companies that cover abortions and deny tax credits to small businesses that purchase health insurance plans offering abortion coverage. Eighty-seven percent of private insurance plans currently include such coverage.

Further, H.R. 3 would eliminate privately funded insurance coverage for abortion in the state-based exchanges set up by the Affordable Care Act. The policy team at NARAL Pro-Choice America estimates that 13.5 million women who receive health coverage through Medicaid and other government-sponsored programs would permanently lose access to abortion coverage if the measure, facing a floor vote Wednesday, passes.

But it hardly stops there:

Some of the more extreme ramifications of the bill, which have attracted a great deal of negative media attention since its introduction in January, include a provision that could subject victims of rape and incest to abortion audits by the IRS. Mother Jones reported in March that H.R. 3 could turn IRS agents into “abortion cops” tasked with determining whether a woman used any kind of tax benefit to pay for a procedure not precipitated by rape or incest.

Marcus Owens, a former longtime IRS official, told Mother Jones that if a woman received a tax credit for medical costs related to abortion, “on audit [she] would have to demonstrate or prove, ideally by contemporaneous written documentation, that it was incest, or rape, or [her] life was in danger. It would be fairly intrusive for the woman.”

H.R. 3 has achieved further notoriety through its attempt to narrow the definition of “rape” as it relates to abortion. Lawmakers pulled language from the original measure that allowed federal funding for abortions only in the case of “forcible rape” after drawing widespread public criticism, but Mother Jones reported on Tuesday that House Republicans are using a backdoor legislative maneuver to ensure the bill achieves the same effect.

But this what they ran on and promised during the campaign, along with spending tax money to defend DOMA. Oh wait, no? Of course, this legislation isn’t going to get through the Senate, and even if it did, the White House has said it would be vetoed.

Meanwhile, Republicans in the Texas House and Senate have reached an agreement on the bill that would require women seeking abortions get sonograms of the fetus conducted via a trans-vaginal probe and at least listen to a description of the resulting image:

State Rep. Sid Miller, R-Stephenville, said he and state Sen. Dan Patrick, R-Houston, had agreed on “the cutout” exempting victims of rape and incest from undergoing the sonogram procedure and on an exemption requested by state Sen. Carlos Uresti, D-San Antonio, for women living more than 100 miles from the nearest abortion provider. The bill would require them to have the sonogram at least two hours before the abortion instead of 24.

Once passed it will be signed into law by Governor Perry whom had laughingly designated it as “emergency legislation.” Conservative lawmakers are also pushing bills to create “pro-life” license plates and defund Planned Parenthood (then even left a little time for the budget).

Oh well, at least they haven’t gotten “campus-carry” through.