Tricks and Traps in the Fine Print

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.”

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 twenty 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 faircontracts.org.

Also, you may wish to send copies of your vendors’ unfathomable fine print contracts, with whatever needs to be deleted to protect your privacy, by email to contracts@faircontracts.org, or by mail in care of Citizen Works, P.O. Box 18478, Washington, D.C, 20036.

RALPH NADER is the author of Only the Super-Rich Can Save Us!, a novel.

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Ralph Nader is a consumer advocate, lawyer and author of Only the Super-Rich Can Save Us! 

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