Seeking Fair Contracts

Ralph Nader

This time the big banks and mort­gage ser­vic­ing com­pa­nies, with their long, one-sided fine print con­tracts, may have out­smart­ed them­selves. The news­pa­per head­lines and the net­work tele­vi­sion news are blaz­ing news of the erupt­ing fraud­u­lent fore­clo­sure process. This long-over­due cov­er­age is gen­er­at­ing pub­lic vis­i­bil­i­ty and sud­den­ly hun­dreds of thou­sands of fore­clo­sures may be ques­tioned due to what one com­men­ta­tor del­i­cate­ly called flawed paperwork.”

Underneath all the fine print abstruseness and evasion of state rules is the contractual tyranny that infects the entire financial service economy.

That is a euphemism for fraud­u­lent­ly exe­cut­ed con­tracts viola­tive of state laws regard­ing home title changes.

As usu­al, the jig was up only after some law­suits were filed by fore­closed home­own­ers assert­ing that there was no proof of own­er­ship of the mort­gage which is nec­es­sary to evict and take back the house or apart­ment building.

Recall before mort­gages were bun­dled, sold and resold as secu­ri­ties, the home­buy­er got a mort­gage from the local bank that held it as an own­er. Then Fan­nie Mae and Fred­die Mac would pro­vide a sec­ondary mar­ket for such mort­gages to enhance the liq­uid­i­ty of the local banks to lend to more homebuyers.

About 20 years ago, the sub­prime mort­gage-backed secu­ri­ties mar­ket, along with prime mort­gage secu­ri­ties explod­ed. They were sold again and again any­where in the world to pen­sion trusts, mutu­al funds, munic­i­pal­i­ties, as far away as north­ern Norway.

Home­own­ers did not know who owned the mort­gages nor did the greedy inter­me­di­aries take care in mak­ing sure that all these var­i­ous con­tracts in the chain of events were prop­er­ly signed and notarized.

The dam start­ed to break when last month, JP Mor­gan Chase, Bank of Amer­i­ca and GMAC Mort­gage declared they were sus­pend­ing fore­clo­sures in the 23 states where they first need a judge’s approval. More banks, like PNC, fol­lowed. Soon all kinds of mem­bers of Con­gress, state attor­neys gen­er­al and state leg­is­la­tors were call­ing for a nation­al mora­to­ri­um on home fore­clo­sures and thor­ough inves­ti­ga­tions on any shenani­gans used for pre­vi­ous foreclosures.

Big num­bers are involved. Last year, 2.8 mil­lion peo­ple received a fore­clo­sure notice and 3.2 mil­lion peo­ple will get one this year. What has been called a wall of loan doc­u­ments” is now being called into question.

The ever-more remote chain between the home­own­er and the investors, who osten­si­bly hold the mort­gage, includ­ed mid­dle­men (the loan orig­i­na­tors) like the Bank of Amer­i­ca and Wells Far­go who ser­viced the mortgage’s month­ly pay­ments for a fee and by agree­ment” were in charge of han­dling fore­clo­sures after a default. Com­put­er­i­za­tion and speed became a trap­door for con­trac­tu­al slop­pi­ness. The banks get high­er fees for fore­clos­ing than for mod­i­fy­ing the loans – cer­tain­ly a per­verse incen­tive at the expense of the belea­guered home­own­er. Banks put their investors first.

Even Mr. Wall Street him­self, Sec­re­tary of the Trea­sury, Tim­o­thy Gei­th­n­er tes­ti­fied before Con­gress in June that the big banks have done a ter­ri­ble job of mak­ing sure that they are doing every­thing they can to meet the needs of their cus­tomers who are fac­ing the pos­si­bil­i­ty of los­ing their home.” Keep in mind that the tax­pay­ers pick up the risk of many default­ed mort­gages, espe­cial­ly through Fan­nie and Freddie.

The matrix of inter­con­nect­ed fine print con­tracts became too rou­tine­ly robo­t­ized. JPMor­gan Chase says they have a tech­ni­cal” paper­work prob­lem with improp­er doc­u­men­ta­tion that is fix­able, but state laws can result in these banks and oth­er part­ners falling by the fine print that they have used to dom­i­nate their con­sumer victims.

Sig­na­tures are required by own­ers, not by prox­ies using robo-elec­tron­ic sig­na­tures via inter­me­di­ate banks. Notaries are not sup­posed to robo-nota­rize. Note the cor­ner­stone of nota­riza­tion from the mod­el notary act of the Nation­al Notary Association:

Any process – paper-based or elec­tron­ic – that is called nota­riza­tion of a sig­na­ture must involve the per­son­al phys­i­cal appear­ance of a prin­ci­pal before a com­mis­sioned notary. …[T]he sign­er must appear in per­son before a duly com­mis­sioned notary pub­lic to affix or acknowl­edge the sig­na­ture and be screened for iden­ti­ty, voli­tion, and basic aware­ness by the notary.”

So casu­al were the big banks about what they con­sid­ered mere for­mal­i­ties,” that they cre­at­ed a com­pa­ny called the Mort­gage Elec­tron­ic Reg­is­tra­tion Sys­tem (MERS) to accel­er­ate the loan secu­ri­ti­za­tion process and save the banks hun­dreds of mil­lions of dol­lars by hav­ing them avoid the expense of fil­ing mort­gages and pay­ing fees each time a loan is resold. How can a com­pa­ny – whether MERS or a bank – seize a home by fore­clo­sure if it does not show proof of own­ing the mort­gage? This is the ques­tion more attor­neys gen­er­al, includ­ing Texas, Mary­land and Con­necti­cut, are demand­ing an answer to from MERS and the Banks.

As the Wash­ing­ton Post report­ed: mort­gages were cre­at­ed, and sold, sliced and diced, pack­aged and repack­aged so quick­ly that finan­cial firms had nei­ther the time nor the patience to file paper­work in local cour­t­hous­es as the loans were trad­ed. By using MERS, lenders were able to reas­sign loans quick­ly and cheap­ly but often the chain of own­er­ship was not accom­pa­nied by an offi­cial paper trail. …These prob­lems con­tributed to the use of flawed and fraud­u­lent paper­work, includ­ing back­dat­ed assign­ments and forged documents.”

State supreme courts in Maine, Kansas and Arkansas have judged that MERS doesn’t own the loans and there­fore can­not fore­close on the hous­es. Oth­er courts have ruled in favor of MERS. But the low­er courts have been caught up with the same robosign­ing. One judge in Flori­da admit­ted to sign­ing off on 6000 fore­clo­sures a week. Notaries fol­lowed with their robo-notor­iza­tions. The judiciary’s embar­rass­ment may affect some appel­late judges’ judiciousness.

Now the title insur­ers are the next link in the chain, espe­cial­ly when the fore­closed home has already been sold to a new buy­er. The spider’s web spreads. A law­suit in Cal­i­for­nia charges that bil­lions of dol­lars in land record­ing fees have not been paid by the respon­si­ble par­ties, includ­ing MERS and the big banks. Where have the bank reg­u­la­tors been all these years?

Under­neath all this fine print abstruse­ness and the back­hand­ed eva­sion of state rules is the con­trac­tu­al tyran­ny that infects the entire finan­cial ser­vice econ­o­my and beyond. To use Pro­fes­sor Eliz­a­beth Warren’s phrase – they are full of tricks and traps” for the consumer.

We have a major reform move­ment under­way to sim­pli­fy and redress the imbal­ance of pow­er between ven­dors and con­sumers. We want to advance all avail­able mech­a­nisms to replace con­trac­tu­al serf­dom with the free­dom of con­tract so tout­ed by our found­ing fathers as a pil­lar of our econ­o­my. For more infor­ma­tion, vis­it fair​con​tracts​.org. Also, you can send copies of your ven­dors’ unfath­omable fine print con­tracts, with what­ev­er needs to be delet­ed to pro­tect your pri­va­cy, by e‑mail to contracts@​faircontracts.​org, or by mail in care of Cit­i­zen Works, P.O. Box 18478, Wash­ing­ton, D.C, 20036.

This arti­cle was pre­vi­ous­ly pub­lished by Com­mon Dreams.

Ralph Nad­er is an attor­ney, author and con­sumer advo­cate. His most recent book — and first nov­el — is iOn­ly The Super-Rich Can Save Us. His most recent work of non­fic­tion is The Sev­en­teen Tra­di­tions. He has been a U.S. pres­i­den­tial can­di­date four times, most recent­ly as an inde­pen­dent can­di­date in 2008.
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