PBI Newsletter, Special Edition - PBI National Conference
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Though the Occupy movement is in the process of changing form, from inhabiting set locations for indefinite time periods, to targeted actions, including It’s satisfying to see that public banking is starting to appear among the central objectives of the movement, though we have a ways to go before it is generally understood and championed. For those of us who already understand the far-reaching effects of publicly owned banks, not only on political economy, but on the social fabric itself, it can be frustrating to see various Occupy General Assemblies and influential speakers get hung up on issues, however important, that are peripheral to the root cause of our planetary dysfunction. That’s why education and outreach are central to PBI’s mission. Because the financials powers that control the world’s banks, corporations, and governments (the .00001%) are constantly breaking laws to steal money and assets from the rest of us. The most blatant attempts to flout the law are finally beginning to catch up with the big banks. In this month’s newsletter, our featured article, a recent effort of our prolific President, Ellen Brown, entitled “Occupy the Neighborhood: How Counties Can Use Land Banks and Eminent Domain,” details the case against the world’s largest commercial banks and explains how counties can use their right of eminent domain to seize foreclosed properties from these criminal organizations. We’re also re-running an updated article from Michael Sauvante that explores the legal and moral justifications for this strategy. By focusing on foreclosure and eminent domain in this edition, we hope to stimulate a national discussion and initiate a county-by-county occupation of the mortgage companies aimed at returning this nation’s wealth to Main Street, and putting the kingpins of these Wall Street schemes where they belong—behind bars! If these articles ring true with you, please send the links to others! Apparently, the concerted efforts of many parties, including PBI, regarding the most egregious criminal aspects of the mortgage fraud, have created urgency for the big banks to squeeze a settlement from the 50 states’ attorneys general. From what we read (see sidebar), it is another case of the profits from the crime far outpacing the penalties. Ellen Brown’s latest article details why the AGs should have held out until more evidence was gathered.
We are also in the throes of a new legislative season and public banking bills are beginning to pop up, with New Hampshire becoming the 15th state to consider the establishment of a state bank, or a study for such, since 2010 and Idaho quickly following suit, becoming the 16th state. Additionally, Virginia, Washington, and Hawaii having updated their previous efforts with new bills, with Virginia’s being for a study, Washington’s for a full-blown public bank, and Hawaii’s for a full-blow bank. As you may know, Illinois also has a bill in play for a state-owned bank from last session that is expected to carry over. On other fronts during the past month, we continue to work with a number of allied organizations, planning joint efforts to address foreclosures and mortgage issues as well as other pressing crises, all of which stem from the private stranglehold over currency and credit. The Constitution is quite clear (Article 1, Section 8) that this power is assigned to the people through their direct representatives (Congress). Granted, verifiable elections and decentralized media must also be present to make this work, but it’s a vision well worth fighting for! Finally, we have set a date for our inaugural conference, April 27-28, in Philadelphia! Follow the links in this newsletter and read the details. This promises to be a special event with some unique presentations, discussions, and resulting synergies. Sign up now and reserve rooms, as Philly is filling up quickly. Here’s to a year filled with continued growth! Robert Bows |
Occupy the Neighborhood: How Counties Can Use Land Banks and Eminent Domain
Ellen Brown
Chairman and President
Public Banking Institute
John O’Brien is register of deeds for Southern Essex County, Massachusetts. He is mad as hell and he isn’t going to take it anymore. He calls his land registry a “crime scene.” A formal forensic audit of the properties for which he is responsible found that:
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Only 16 percent of the mortgage assignments were valid.
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Twenty-seven percent of the invalid assignments were fraudulent, 35 percent were “robo-signed” and 10 percent violated the Massachusetts Mortgage Fraud Statute.
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The identity of financial institutions that are current owners of the mortgages could be determined for only 287 out of 473 (60 percent).
- There were 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership could be traced.
At the root of the problem is that title has been recorded in the name of a private entity called MERS as a mere placeholder for the true owners. The owners are a faceless, changing pool of investors owning indeterminate portions of sliced and diced securitized properties. Their identities have been so well hidden that their claims to title are now in doubt. According to the auditor:
What this means is that … the institutions – including many pension funds – that purchased these mortgagesdon’t actually own them….
The March of the Attorneys General
John O’Brien was thrilled when Massachusetts Attorney General Martha Coakley went to court in December against MERS and five major banks – Bank of America Corp., JPMorgan Chase, Wells Fargo, Citigroup and GMAC. Coakley says banks have “undermined our public land record system through the use of MERS.”
Other attorneys general are also bringing lawsuits. Delaware Attorney General Beau Biden is going after MERS in a suit seeking $10,000 per violation. “Since at least the 1600s,” he says, “real property rights have been a cornerstone of our society. MERS has raised serious questions about who owns what in America.”
Biden’s lawsuit alleges that MERS violated Delaware’s Deceptive Trade Practices Act by:
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Hiding the true mortgage owner and removing that information from the public land records.
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Creating a systemically important, yet inherently unreliable, mortgage database that created confusion and inappropriate assignments and foreclosures of mortgages.
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Operating MERS through its members’ employees, whom MERS confusingly appoints as its corporate officers so that they may act on MERS’ behalf.
- Failing to ensure the proper transfer of mortgage loan documentation to the securitization trusts, which may have resulted in the failure of securitizations to own the loans upon which they claimed to foreclose.
This last allegation – that there are fatal defects in the loan documentation – may be even more conclusive than the MERS defect in establishing a break in the chain of title to securitized properties. Mortgage-backed securities are sold to investors in packages representing interests in trusts called REMICs (Real Estate Mortgage Investment Conduits). REMICs are designed as tax shelters; but to qualify for that status, they must be “static.” Mortgages can’t be transferred in and out once the closing date has occurred. The REMIC Pooling and Servicing Agreement typically states that any transfer after the closing date is invalid. Yet few, if any, properties in foreclosure seem to have been assigned to these REMICs before the closing date, in blatant disregard of legal requirements. The whole business is quite complicated, but the bottom line is that title has been clouded not only by MERS, but because the trusts purporting to foreclose do not own the properties by the terms of their own documents.
Courts Are Taking Notice
The title issues are so complicated that judges themselves have been slow to catch on, but they are increasingly waking up and taking notice. In some cases, the judge is not even waiting for the borrowers to raise lack of standing as a defense. In two cases decided in New York in December, the banks lost although their motions were either unopposed or the homeowner did not show up, and in one, there was actually a default. No matter, said the court; the bank simply did not have standing to foreclose.
In Citigroup v. Smith, 2011 NY Slip Op 52236 (U) (December 13, 2011), the mortgage document acknowledged that MERS was not the lender, but was “a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns.” The court held that since MERS was not a party to the underlying note, when it assigned the mortgage to plaintiff Citigroup there was no assignment of the note; and “a transfer of [a] mortgage without the debt is a nullity and no interest is acquired by it.”
Failure to comply with the terms of the loan documents can make an even stronger case for dismissal. In Horace v. LaSalle, Circuit Court of Russell County, Alabama, 57-CV-2008-000362.00 (March 30, 2011), the court permanently enjoined the bank (now part of Bank of America) from foreclosing on the plaintiff’s home, stating:
[T]he court is surprised to the point of astonishment that the defendant trust (LaSalle Bank National Association) did not comply with New York Law in attempting to obtain assignment of plaintiff Horace’s note and mortgage….[P]laintiff’s motion for summary judgment is granted to the extent that defendant trust … is permanently enjoined from foreclosing on the property….
Relief for Counties: Land Banks and Eminent Domain
The legal tide is turning against MERS and the banks, giving rise to some interesting possibilities for relief at the county level. Local governments have the power of eminent domain: they can seize real or personal property if (a) they can show that doing so is in the public interest, and (b) the owner is compensated at fair market value.
The public interest part is easy to show. In a 20-page booklet titled “Revitalizing Foreclosed Properties with Land Banks,” the US Department of Housing and Urban Development (HUD) observes:
The volume of foreclosures has become a significant problem, not only to local economies, but also to the aesthetics of neighborhoods and property values therein. At the same time, middle- to low-income families continue to be priced out of the housing market while suitable housing units remain vacant.
The booklet goes on to describe an alternative being pursued by some communities:
To ameliorate the negative effects of foreclosures, some communities are creating public entities – known as land banks – to return these properties to productive reuse while simultaneously addressing the need for affordable housing.
States named as adopting land bank legislation include Michigan, Ohio, Missouri, Georgia, Indiana, Texas, Kentucky and Maryland. HUD notes that the federal government encourages and supports these efforts. But states can still face obstacles to acquiring and restoring the properties, including a lack of funds and difficulties clearing title.
Both of these obstacles might be overcome by focusing on abandoned and foreclosed properties for which the chain of title has been broken, either by MERS or by failure to transfer the promissory note according to the terms of the trust indenture. These homes could be acquired by eminent domain both free of cost and free of adverse claims to title. The county would simply need to give notice in the local newspaper of an intent to exercise its right of eminent domain. The burden of proof would then transfer to the bank or trust claiming title. If the claimant could not prove title, the county would take the property, clear title and either work out a fair settlement with the occupants or restore the home for rent or sale.
Even if the properties were acquired without charge, counties might lack the funds to restore them. Additional funds could be had by establishing a public bank that serves more functions than just those of a land bank. In a series titled “A Solution to the Foreclosure Crisis,” Michael Sauvante of the National Commonwealth Group suggests that properties obtained by eminent domain can be used as part of the capital base for a chartered, publicly owned bank, on the model of the state-owned Bank of North Dakota. The county could deposit its revenues into this bank and use its capital and deposits to generate credit, as all chartered banks are empowered to do. This credit could then be used not just to finance property redevelopment, but for other county needs, again on the model of the Bank of North Dakota. For a fuller discussion of publicly owned banks, see http://PublicBankingInstitute.org.
Sauvante adds that the use of eminent domain is often viewed negatively by homeowners. To overcome this prejudice, the county could exercise eminent domain on the mortgage contract rather than on title to the property. (The power of eminent domain applies both to real and to personal property rights.) Title would then remain with the homeowner. The county would just have a secured interest in the property, putting it in the shoes of the bank. It could renegotiate reasonable terms with the homeowner, something banks have been either unwilling or unable to do, since they have to get all the investor-owners to agree, a difficult task; and they have little incentive to negotiate when they can make more money on fees and credit-default-swaps on contracts that go into default.
Settling With the Investors
What about the rights of the investors who bought the securities allegedly backed by the foreclosed homes? The banks selling these collateralized debt obligations represented that they were protected with credit-default-swaps. The investors’ remedy is against the counterparties to those bets – or against the banks that sold them a bill of goods.
Foreclosure defense attorney Neil Garfield says the investors are unlikely to recover on abandoned and foreclosed properties in any case. Banks and servicers can earn more when the homes are bulldozed – something that is happening in some counties – than from a sale or workout at a loss. Not only is more earned on credit-default-swaps and fees, but bulldozed homes tell no tales. Garfield maintains that fully a third of the investors’ money has gone into middleman profits rather than into real estate purchases and “with a complete loss no one asks for an accounting.”
Not only homes and neighborhoods, but 400 years of property law are being destroyed by banker and investor greed. As Barry Ritholtz observes, the ability of a property owner to confidently convey his property is a bedrock of our society. Bailing out reckless financiers and refusing to hold them accountable has led to a fundamental breakdown in the role of government and the court system. This can be righted only by holding the 1 percent to the same set of laws as are applied to the 99 percent. Those laws include that a contract for the sale of real estate must be in writing signed by seller and buyer, that an assignment must bear the signatures required by local law and that forging signatures gives rise to an actionable claim for fraud.
The neoliberal model that says banks can govern themselves has failed. It is up to county government to restore the rule of law and repair the economic distress wrought behind the smokescreen of MERS. New tools at the county’s disposal – including eminent domain, land banks and publicly owned banks – can facilitate this local rebirth.
Featured Article: Robosigning is Just the Tip of the Iceburg
Published on Sunday, February 5, 2012 by Common Dreams
Ellen Brown
A foreclosure settlement between five major banks guilty of “robo-signing” and the attorneys general of the 50 states is pending for Monday, February 6th; but it is still not clear if all the AGs will sign. California was to get over half of the $25 billion in settlement money, and California AG Kamala Harris has withstood pressure to settle.
That is good. She and the other AGs should not sign until a thorough investigation has been conducted. The evidence to date suggests that “robo-signing” was not a mere technical default or sloppy business practice but was part and parcel of a much larger fraud, the fraud that brought down the whole economy in 2008. It is not just distressed homeowners but the entire economy that has paid the price, resulting in massive unemployment and a shrunken tax base, throwing state and local governments into insolvency and forcing austerity measures and cutbacks in government services across the nation.
The details of the robo-signing scam were spelled out in my last article, here. The robo-signing fraud and its implications are expanded on below.
Why All the Robo-signing?
Over half the homes in the country are now held in the name of an electronic database called MERS—Mortgage Electronic Registration Services. MERS is a smokescreen concealing the fact that these mortgages were sold to trusts that sold them to investors. The mortgages were chopped into pieces and sold as “mortgage-backed securities” (MBS), which traded in a supposedly liquid market. That meant the investors could sell them in the money market at any time on a day’s notice. Yale economist Gary Gorton gives this example:
Suppose the institutional investor is Fidelity, and Fidelity has $500 million in cash that will be used to buy securities, but not right now. Right now Fidelity wants a safe place to earn interest, but such that the money is available in case the opportunity for buying securities arises. Fidelity goes to Bear Stearns and “deposits” the $500 million overnight for interest. What makes this deposit safe? The safety comes from the collateral that Bear Stearns provides. Bear Stearns holds some asset‐backed securities [with] a market value of $500 millions. These bonds are provided to Fidelity as collateral. Fidelity takes physical possession of these bonds. Since the transaction is overnight, Fidelity can get its money back the next morning, or it can agree to “roll” the trade. Fidelity earns, say, 3 percent.
That is where the robo-signing came in. Foreclosure defense attorneys armed with the tools of discovery have discovered that robo-signing — involving falsified signatures assigning mortgages back to the trusts allegedly owning them — occurred not just occasionally or randomly but in virtually every case. Why? Because the mortgages had to be left free to be bought and sold on a daily basis in the money market by investors. The investors are not interested in making 30 year loans. They want something short-term with immediate rights of withdrawal like a deposit account.
The Hazards of Borrowing Short to Lend Long
The problem is that when panicked investors all exercise that right at once, there is no cheap funding available to back the 30 year mortgage loans, rendering the banks insolvent. And that is what happened on September 15, 2008, when Lehman Brothers, a major investment bank like Bear Stearns, went bankrupt.
According to Representative Paul Kanjorski, speaking on C-SPAN in January 2009, the collapse of Lehman Brothers precipitated a $550 billion run on the money market funds. A report by the Joint Economic Committee pointed to the fact that the $62 billion Reserve Primary Fund had “broken the buck” (fallen below a stable $1 per share) due to its Lehman investments. The massive bank run that followed was the dire news that Treasury Secretary Henry Paulson presented to Congress behind closed doors, prompting Congressional approval of Paulson’s $700 billion bank bailout despite deep misgivings.
The sleight of hand that brought the banking system down was that the mortgages backing the money market were supposedly held by trusts that had lent money to homeowners for 15 years or 30 years. It was the classic “borrowing short to lend long,” a form of shell game in which banks have engaged for hundreds of years, routinely precipitating bank panics and bank runs when the depositors or the investors all pull their short-term money out at the same time.
The Shadow Banking System Is Still Unregulated
Periodic bank panics were averted in the conventional banking system only when the government agreed to insure the deposits of individual depositors in 1933. But FDIC insurance covered only $100,000 (now $250,000), and large institutional investors had far more than that to invest. The shadow banking system, in which deposits were “insured” with mortgage-backed securities, developed in response. But the shadow banking system is unregulated and is just as prone to another collapse today as it was in 2008. The Dodd-Frank banking “reforms” barely touched it. As noted in an article titled “Risky Debt Use on Repo Market Hits 2008 Levels” in Friday’s Financial Times:
In the repo market, banks pledge their securities as collateral for short-term loans from money managers and other investors. The market played a key role in the build-up to the 2008 financial crisis. Banks used toxic assets, such as repackaged subprime loans, to secure trillions of dollars worth of cheap funding.When the US housing bubble burst, the banks’ trading partners refused to accept such securities as collateral and the repo market rapidly contracted.
However, a study by Fitch Ratings says the proportion of bundled debt being used as security in repo transactions has returned to pre-crisis levels.
Using the repackaged loans can increase risk in the repo market, the rating agency says. This is because the securities may be prone to sudden pullbacks such as the one experienced in 2008.
We could be looking at another banking collapse at any time; and to fix the problem, we first need to know what is going on. The AGs should not agree to drop the curtain on the robo-signing scandal until all the evidence is on the table. It is not just a matter of punishing the guilty; it is a matter of a banking scheme based on fraud, one that ultimately does not work and has jeopardized the homes, savings and investments of the public not just recently but for hundreds of years.
The Way Out
There is another way to design a banking system. The deposits of large institutional investors do not need to be backed by sliced and diced pieces of our homes to be “safe” (something that has proven not to be safe at all). The large institutional investors seeking safety are largely “us” – the pension funds and mutual funds in which we have stored our savings and on which we rely for support when we can no longer work. Hundreds of years of history have demonstrated that the only reliable guarantor is the government itself.
Our pension funds and mutual funds need a government guarantee just as much as our individual deposits do. But we don’t want to be guaranteeing the gambling and derivatives schemes of too-big-to-fail, for-profit Wall Street banks playing fast and loose with our money. Banking and credit need to be public utilities, operated for the benefit of the public in plain sight of the public.
More about the Public Banking Institute
The Public Banking Institute (PBI) was formed in January 2011 as an educational non-profit organization. Its mission is to further the understanding, explore the possibilities, and facilitate the implementation of public banking at all levels — local, regional, state, and national.
PBI’s vision is to establish a distributed network of state and local publicly-owned banks that create affordable credit, while providing a sustainable alternative to the current high-risk centralized private banking system. This network will act in the public interest, using its counter-cyclical credit-generating capacity to stabilize potential credit crises, maintain the floor against threats of asset devaluations, build infrastructure, and fund expansion of critical industrial productive capacity. Most important, public banking will create jobs, by partnering with local banks to fund local business, advancing credit for public infrastructure, and augmenting government revenues.
PBI’s mission includes analyzing U.S. and global financial events to facilitate public banking, sharing best practices and lessons learned from research and initiatives in the U.S. and around the globe, and providing resources using PBI’s website, webinars, blogs, and in-person conferences. PBI’s activities include:
•Publication of research involving the U.S. private banking system, past and current;
•Evaluation of existing and historical public banking models, in the U.S. and abroad;
•Publication of research regarding the legal requirements, structure, and daily operations of existing and proposed public banking and financing systems;
•Publication of a semi-annual legislative guide and presentations to aide local public banking initiatives; and
•Organization of public forums that enable state and local public banking efforts.
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For more information on how BND operates, and how it partners with community banks instead of competing with them as private transnational banks do:
• “Public Banking in America” Legislative Guide, Spring 2011, pp. 17-23. Ed Sather and bankers from several states explore the North Dakota model.
• Bank of North Dakota, banknd.nd.gov.
• Public Banking Institute, publicbankinginstitute.org
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