Nearly four months ago, I suggested the Mortgage Electronic Registration System (MERS), which processes half of all U.S. mortgages, has effectively removed the liability for the debt service payments on its mortgages ($5 trillion).
Merscorp., which operates MERS, is owned by the largest lenders including Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Fannie Mae, and Freddie Mac.
In a recent decision, U.S. Bankruptcy Judge, Robert E. Grossman, stated: “MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage-recording process. The court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country, that is reason enough for this court to turn a blind eye to the fact that this process does not comply with the law.”
According to Bloomberg News, “MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not supported by the law,” Grossman wrote in a Feb. 10 opinion. “MERS did not have authority, as ‘nominee’ or agent, to assign the mortgage absent a showing that it was given specific written directions by its principal.”
In essence, they lack the legal authority to transfer mortgages, which eliminates the need for its existence. The residential mortgage market totals nearly $10 trillion. Roughly half, or $5 trillion, may not possess a legal owner who is responsible for payment.
Within one week of Judge Grossman's decision, MERS issued the following directive to its members:
"In recent months legal challenges have arisen regarding alleged inadequacies and improprieties in the foreclosure process including allegations of insufficient or incorrect supporting documentation and challenges to the legal capacity of parties’ right to foreclose," the directive read.
"MERS is committed to re-evaluate and strengthen its systems and procedures to protect against these types of legal challenges. Consistent with this approach we have enhanced the Corporate Resolution Management System (CRMS) and instituted related policies and procedures designed to strengthen MERS’ business practices and limit compliance risks," it read.
"MERS is planning to shortly announce a proposed amendment to require Members to not foreclose in MERS’ name.”
Compounding this negligence is a recent finding that the National Association of Realtors (NAR) may have overstated government data for sales of previously existing homes. CoreLogic, a real estate analytics firm, suggests the error may be as much as 10 percent to 20 percent per annum over the past decade.
Contributing factors may include multiple real estate listings for the same home, in which the same home is considered sold multiple times, and higher assumptions for sales not involving a real estate broker.
This indicates there may have been lower sales, which translates into greater inventories (supply).
James J. Saccacio, chief executive officer of RealtyTrac, said “foreclosure levels remained five to 10 times higher than historic norms in most of those hard-hit markets, where deep fault lines of risk remain and could potentially trigger more waves of foreclosure activity in 2011 and beyond.” RealtyTrac reports 2010 foreclosures at 2.9 million.
Recently, the Federal Reserve Bank of New York reported that nearly 1.5 million homes are severely delinquent (imminent foreclosure) and another 1.5 million are more than 120 days delinquent (highly probable foreclosure).
The Office of the Controller of the Currency (OCC) suggests the overall default rate for loan modifications is roughly 33 percent (43 percent for those backed by government agencies such as the Federal Housing Administration).
According to Moody’s, a current modified loan is three times more likely to default over the ensuing 12 months than a non-modified current loan.
Commercial real estate has dropped in price by roughly 40 percent during the financial crisis. According to Real Capital Analytics, 4.17 percent of commercial real estate loans ($45.5 billion) were in default at the end of March 2010. This is the highest level since it was first reported in 1992, when it was 4.55 percent. During the first half of 2006, this figure was 0.58 percent.
Trepp LLC indicates the default rate of commercial mortgage-backed securities (CMBS) reached 8.42 percent in May of 2010, the highest in the history of the CMBS industry. One year before it was 2.77 percent.
This data suggest further increases in supply of real estate over the next six to 12 months due to foreclosures in process, serious delinquencies and an increase in inventory adjustment. The increased supply will create lower demand for ancillary services and reduced commercial activity.
An increase in supply coupled with anemic demand portends further price declines in real estate over the ensuing six to 12 months. This reduction may be reflected in equity pricing over the coming months as well.
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