Massachusetts AG Coakley Takes on the Banks

Note, MERS section substantially updated

The posse of Wall Street Sheriffs just got bigger: Massachusetts Attorney General Martha Coakley joined Nevada Attorney General Catherine Cortez Masto, New York Attorney General Eric Schneiderman and Delaware Attorney General Beau Biden. AG Coakley’s effort is the most comprehensive to date by far, in that she sues five major banks (Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally) and MERS for unlawful and deceptive conduct. (AG Masto still retains the title as the only AG bold enough to indict people.) Her suit does not include all the kinds of claims other AGs have alleged, however, and some of the claims are uniquely provable under Massachussets law.

AG Coakley targets the banks for illegal foreclosures, something that’s unusually easy for her to prove happened because of the Massachusetts Supreme Court’s very clear ruling in Ibanez. She goes after them for messing up Massachusetts land records through the use of MERS. Coakley also targets the banks’ endless deceptive behavior on loan modifications.

At the press conference, AG Coakley was clear she sought “real accountability” and “real and enforceable relief”, and that’s why she sued rather than continue to focus on the “50″ State AG settlement that is supposedly always imminent. Coakley was clear that there was no agreement in the offing as of now, because the banks are refusing to play ball. She said (I’m paraphrasing) the banks won’t accept real responsibility for the damage they’ve done, and they want to be absolved of everything. I confess it was refreshing to hear those kinds of statements from an AG publicly. While she wouldn’t rule out signing off on a national settlement, it was obvious the terms would have to be very different from what’s currently on the table to make it work.

Coakley also highlighted how economically devastating the foreclosure crisis is, and how crazy it is that servicers are rushing to foreclose loans that should be modified because modification is better for the investor and homeowner. That big picture perspective was also great to hear.

The complaint is an easy if dry read because the vast majority of it is simply case studies of how each of the five banks and MERS didn’t file the right documents. The mini-cases are helpful in illustrating just how thoroughly the land records have been screwed up, but of course don’t show the scope of the problem. That’s why Coakley ended the case studies by saying, in essence: look, we’ve got them dead to rights on these examples, and we’ll find out how many more there are just like these by discovery. I can only imagine the discovery request; it’ll apply to all foreclosures pending or completed.

The mortgage modification sections aren’t mini-cases, which is too bad because the many deceived homeowners might’ve loved to read the AG layout their nightmare vividly and call it “deceptive.” I mean, she did call all things modification deceptive and that should be heartening enough.

MERS Illegal for 15-20% of Land in Massachusetts?

The part of the complaint that struck me the most is the section on MERS. MERS’s selling point, it’s raison d’etre, is its claim that it eliminates the need to prepare and record assignments of mortgage. But Coakley argues that this Massachusetts statute language, Massachusetts land that is “registered”, trumps MERS’s business model:

Section 67. The owner of registered land may mortgage it by executing a mortgage deed. Such deed may be assigned, extended, discharged, released in whole or in part, or otherwise dealt with by the mortgagee by any form of deed or instrument sufficient in law for the purpose. But such mortgage deed, and all instruments which assign, extend, discharge and otherwise deal with the mortgage, shall be registered, and shall take effect upon the title only from the time of registration. (from here, bold mine.)

Coakley’s interpretation is that when the beneficial interest in the mortgages transferred as the note was sold and resold, the purchasers had to register those transfers. Though she doesn’t say it, her key support would be “and otherwise deal with the mortgage”, because the Supreme Judicial Court in Ibanez was clear that a mortgage wasn’t assigned just because a note was transferred (see Ibanez at p. 11) even though the beneficial interest in the mortgage did flow with the note. In short, the act of transferring the note wouldn’t constitute “assign, extend, [or] discharge” of the mortgage.

Glenn Russell Jr., the Massachusetts attorney who represented the LaRace family in the Ibanez case told me 15-20% of Massachusetts land is registered. That’s not tons, but it’s not insignificant either.

If Coakley wins this point, it’s a big deal because MERS and the banks would owe Massachusetts the fees for any unregistered transfer that happened within the MERS system, which could be real money even though only 15-20% of the land is involved. MERS’s business model would be illegal for this subset of Massachusetts land. One problem for Coakley is this official but non-binding guidance from the land court itself on how registrars should handle MERS for registered land, which seems to okay it. (See intro for non-binding; see page 88 for the MERS section.)

Does any one from Massachusetts have an opinion on Coakley’s argument? Coakley asks the court to agree with her by asking for declaratory judgment, so eventually we’ll find out.

What About Securitization of Registered Land?

Regardless of whether Coakley wins the point, however, it seems to me that she’s raised a crucial issue with the securitization of registered Massachusetts land. Securitization is supposed to involve actual transfers of mortgages and legal title, so the “assign” applies in the statute above. We know that the assignments of mortgage in securitization aren’t generally recorded during that process. And no, MERS’s magic status as a universal agent for MERS members without the traditional documentation of agency couldn’t correct this problem because the special purpose entities in securitizations aren’t MERS members.

It doesn’t matter if the trustee at the end of the process is a MERS member if MERS didn’t work to bring the the legal title and thus secured loan into the trust in the first place. Frankly, there’s an argument that no MERS loans make it into securitization trusts without the securitization vehicles being MERS members, but I’m making a much smaller claim. I’m just talking about Massachusetts registered land.  Under MERS’s own terms, the mortgage should have been assigned out of MERS, to the first securitization entity that wasn’t a member, and assigned between all such entities, and then assigned from the last entity to the trust/trustee. And according to the statute above, each of those assignments had to be registered to have any impact on legal title.

And it’s not just Massachusetts land registered to MERS; the problem applies to all Massachusetts registered land loans that were securitized if the intervening assignments weren’t done or were done but not registered.

Since only 15-20% of Massachusetts land is registered, and I don’t know how many securitized Massachusetts mortgages are registered, I don’t know how big this problem is. Maybe it’s quite small. Regardless, it’s another example of “the utter carelessness with which the plaintiff banks documented the titles to their assets”, as the Ibanez concurrence put it.

What’s Not in the Suit

As comprehensive as the suit is when it comes to defendants, it skips some potentially potent claims that other AGs have made. For example, Coakley doesn’t touch the inherently deceptive nature of MERS as spelled out by AG Biden. She also doesn’t talk about securitization fail as NV and NY have done. And she doesn’t say “criminal.” But the suit is still far more action than 46 AGs have taken to date and with it AG Coakley has earned her badge and spurs.

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