MERS Fraud Impact On CMBS: Up To $280 Billion Per Barclays

Tyler Durden's picture

Two weeks ago we first touched upon a key tangential topic of the whole mortgage mess, namely the implication of what potential MERS fraud means for Commercial Mortgage Backed Securities. Well, the topic which has so far avoided broad media attention to the benefit of all CMBS holders may be about to go mainstream. As part of our initial inquiry, we asked: "If residential mortgage foreclosures are being halted and if the very fabric of the MBS securitization architecture is put into question, when will someone ask whether MERS® Commercial allowed such pervasive title fraud as is now apparently ubiquitous in the residential space, to take the CMBS space by storm, and how many billions in dollars will Banc of America Securities, Bear Stearns (d/b/a JP Morgan), GE Capital Real Estate, GMAC Commercial, John Hancock and Wells Fargo be forced to buy back loans that were fraudulently certified." Our question is now being reiterated by Barclays Capital. Next up Bloomberg, Ratigan, and everyone else.

In a note released to clients yesterday, Barclays' Julia Tcherkassova notes that finally MERS foreclosure issues may be spreading to commercial real estate, after "recent lawsuits have raised questions about the legal standing of MERS as a foreclosing entity and an electronic record keeper." And even though Julia attempts to mitigate the full risk of CMBS putbacks and other forms of deal unwinds by stating that foreclosures in the space are still relatively modest (to which one can answer quite simply by asking what the 30, 60 and 90-day delinquency rate is... spoiler alert: record), even she is forced to acknowledge that by looking at the numbers, the upside risk potential is for as much as $280 billion of conduit deals: "we conducted a quick search through the PSAs and pro-sups of deals securitized between 2004 and 2008 and estimated that about $280bn worth of conduit deals have some MERS language in them." A second approach which involves tracking not shelf names but the originator's original exposure to MERS yields a lower downside estimate of about $82 billion. The bottom line is that nobody really knows, and because the MERS Commercial database is not open for public use, and only "broad-based estimates within the CMBS universe could be drawn" it is safe to say that nobody really knows how many deals in the critical 2004-2008 vintages were exposed to the MERS "virus." The final answer: a lot.

And while we will present the BarCap note below as a primer for all other journalists who are way overdue in finally following on this issue which will impact nearly $3 trillion in securitized loans, a far more interesting disclosure is the fact that as Barclays discloses, MERS involvement was in fact presented as a boilerplate risk factor to CMBS transactions. As a result, any additional adverse findings on MERS immediately open up the banks to massive rep and warranty lawsuits, and make the MERS issue orders of magnitude more problematic for the banks to deal with than simple putback issues at the servicer level.

To wit:

Some deal documents do contain a standard risk disclaimer listed under: "The Recording of the Mortgages in the Name of MERS May Affect the Yield on Your Certificates," specifically:

"The recording of mortgages in the name of MERS is a new practice in the commercial mortgage lending industry. Public recording officers and others may have limited, if any, experience with lenders seeking to foreclose mortgages, assignments of which are registered with MERS. Accordingly, delays and additional costs in commencing, prosecuting and completing foreclosure proceedings and conducting foreclosure sales of the mortgaged properties could result. Those delays and the additional costs could in turn delay the distribution of liquidation proceeds to certificate-holders and increase the amount of losses on the loans."

The banks were perfectly aware that MERS could be a major stumbling block in deal underwriting and put it up front and center as a key risk factor. And since the investor did sign off on this risk, the question really becomes who is more liable: the underwriter or the investor? Is this the smoking gun loophole that banks will huddle around and pull the Goldman excuse that it was really the "sophisticated investor's" duty to perform their own due diligence, with the risk factor out there front and center?

However, just as there is no transparency with regard to MERS commercial, so there appears to be no real disclosure when it comes to servicer opinion on loan doc transfers.

With even Barclays admitting there is risk to near-term prices, (and there certainly is major risk to long-term prices, however it is no bank's interest to admit this: just note the variance in the RMBS putback estimate range, which is from $30 billion to over $100 billion), one wonders: just what are all the investors in assorted tranches of CMBX deals thinking (NA 4 below shown indicatively). If indeed RMBS is about to be unwound due to prevalent MERS fraud, what does this means for CMBS, and for the billions of REITs who have levered up to infinity in full expectation that the Fed will bail them out due to the imminent lack of cash flow coming from tenants? After today's various letters do these same REITs still believe that the Fed will keep pumping money in perpetuity to bail out a few worthless asset managers? And what happens when the MERS fraud in CMBS is attacked in full by the plaintiff bar? We can't wait to see the results.

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Turd Ferguson's picture

Just like BLS BS numbers, something tells me that these "fraud impact" numbers will only be adjusted and re-stated higher and higher as time goes by.

Off-topic but since I've been asked to update my short-term opinion on PM prices: After today's action, I fully expect gold to trade down to or slightly below 1300 by Friday or overnight Sunday. If it does, BUY. Buy with both hands. It may fiddle-faddle around through the "big announcement" next week but, once that noise is behind us, the trend up will begin again. The typical Q4 runup awaits. I still expect $1500 to print on or before 12/10/10. 

Turd Ferguson's picture

Probably see it trade under 23, maybe even to 22.50

If so, BUYBUYBUY. The Comex, particularly in silver, is broken. Period.

mikla's picture

Just like BLS BS numbers, something tells me that these "fraud impact" numbers will only be adjusted and re-stated higher and higher as time goes by.


Just look at Greece -- that's exactly what they do.  Report small, then keep inching them higher, until people are so tired of the updates that they no longer pay attention.  Just avoid the shock value, and you're good.

Ditto for getting the public to now be de-sensitized to TRILLION.  That was such an obscenely unreal number only a couple years ago, that Paulson asked for $700B (later $800B) because he wanted an "obscenely large number".

Ditto for how banks report their losses -- they have been bankrupt since 2007, but they can keep adjusting their reported losses "upwards" every time there's some room to do so, each time the Fed gives them reporting headroom.

sweet ebony diamond's picture


You are quite the chef.

unwashedmass's picture


You know, at this point, we need to start talking about the mutual fund managers -- at our friendly TBTF banks selling the inhouse funds -- who are "capitalizing on this buying opportunity in financials"....

and indicting a few of them......

cause let's face it, the banks are just unloading the crap stocks on the mutual fund investors who are left....

the ones who believe the "invest for the long term mantra"...

a couple of indictments would be a good thing for all.

GlassHammer's picture

"invest for the long term mantra"

Because risk decreases the longer you invest.


Mitchman's picture

If they didn't indict the Orange Guy from Countrywide, who will they indict?

GlassHammer's picture

But the Orange Guy had a bunch of fruity friends so he got away with it.

akat's picture

  I noticed FDIC head Bair proposed a 'global fix' involving a 25% discounted refinance, to try and fix the mortgage security mess.  I imagine this is just an opening attempt and they may change the numbers or put different conditions on it.  But I think this shows that higher ups in government may know what is going on, although they won't tell the public this.  I am curious what people think as to whether this would fix the problem?  I guess it would to an extent, but if some of these loans have been packaged and sold multiple time, then I not so sure that can be fixed.  Talk about a slow motion train wreck, that is this unrecognized and immense fraud. 

kaiserhoff's picture

Sheila is getting desperate. They can no longer handle the failed banks with the old self-insured system.  It's like a failing condo project.  Every default puts more cost and pressure on those left standing.

On the other hand the 25% solution is pure BS.  You can't just tear up thousands of contracts because things aren't going your way.  That would get Barry's black ass impeached for sure.  The times, they are a changin'.

JLee2027's picture

Refusal to secure the Border is grounds enough to impeach.

StychoKiller's picture

Per a previous article on Social Security, the Govt Accountants are actually factoring in and relying on illegal immigrants to "contribute" to Social Security's solvency, is it any wonder then that the Govt is dragging its feet on Border enforcement?

SDRII's picture

Isnt that something like $1-$2T or 10% of GDP

eatthebanksters's picture

40% is what's needed at a minimum

detersbb's picture

We are at the threshold of entering the Bannanna Republic Dictatorship here.  If there is not a vigorous effort to prosecute millions of people here engaged in perpetuating this fraud up to and including former presidents, vps, secertary of treasuries of the US and congress, and the JUDICIARY.  Unless and until the rule of law is adhered to we are not a country, only an area under the rule of anarchy (rule by corporations including the US Government 28 USC 3002 15(a).  I have had it. 

Cognitive Dissonance's picture

We are at the threshold of entering the Bannanna Republic Dictatorship here. 

May I suggest that we are at the threshold of recognizing that we long ago entered the Banana Republic Dictatorship here. 

Max Hunter's picture

"The high office of President has been used to foment a plot to destroy the American's freedom, and before I leave office I must inform the citizen of his plight."
--John F. Kennedy, at Columbia University, 10 days before his assassination.


This country has gone down the shitter at an explosive speed since the murder of Kennedy.. Anyone believing the "lone nut" theory needs their head checked.

Coast Watcher's picture

Sorry, but that's a Bogus quote. Kennedy never visited Columbia University in November '63. Ten days before his assassination he was in the Oval Office.

Not that I disagree that the lone gunman explanation is just as bogus, if for no other reason than that man with that rifle could never have made those shots.

legerde's picture

Hey CD.  <offtopic>  I saw that you asked to see your note.  Total runaround for at least 2 weeks now?   I asked too and have had silence in return.   Ive hired a lawyer.

We really need to organize by state since state laws usually deal with property laws.

I have finally come to grips with the ethics of my participation in the situation.  These "deadbeats?" have a legal argument that either works or it doesn't.  I think I understand the argument and I think it probably works.  If "all men are created equal", then the argument works whether you are a "deadbeat" or not.  It really doesn't matter. 

But like you said about "burning down the door".  I dont think they are going to respond to my requests until I stop paying.  So I have that lawyer to discuss the situation in full prior to embarking down the stop paying path.

I am anxious to hear updates on your situation.


legerde's picture

The lawyer is shocked because its very unusual for her to have a client that has some fiat and is not currently in litigation.

Cognitive Dissonance's picture

The first lawyer I talked to was so thoroughly captured by the system (meaning the system must be real and legal because the system has/is working) that I immediately saw that I would be fighting my lawyer's vested interest if I engaged her.

I talked to a second lawyer today that doesn't make all or even most of her bread and butter from real estate, but does have a lot of experience with real estate. She sounds like she might be willing to discuss heresy. We are physically meeting next week.

legerde's picture

Yes, finding the right lawyer is tricky.   May I ask what state you are in? 

My lawyer seems to get it.  She is currently preparing for me a description of what is required by the laws of my state:

* Transferring and Recording Title

* Failure to Notify and Record Title

* Definition of Holder in Due Course

* What is my states position on MERS

* Any current case law on MERS in my state

After we have a thorough understanding of these items, we will know exactly what to ask the bank to provide in terms of proof. 

JLee2027's picture

Nice that she gets her self-education paid for by you. Don't just give blanket permission to be billed for that, discuss how many hours you are willing to pay considering future clients will benefit from this and don't have to pay it.

litoralkey's picture

As you are facing at the street level view, Ive come to the conclusion the following phrase has surpassed it operational capacity:

"United States legal system capacity"

United: for how much long?

United States legal: Resurgence of 10th Amendment arguments, states declaring bk, etc

legal system: When trillions are on the table, we do not have a legal system, we revert to the biggest gun system of possession.

system capacity: Florida, California, Arizona, Nevada and Michigan have surpassed capacity... the system has surpassed capacity in the philosophical sense of ancient terms of 'justice'... tbd what happens.

Not enough judges, not enough courtrooms, not enough mediators, not enough back office staff, not enough , just not enough.



alien-IQ's picture

"Going to trial with a lawyer who considers your whole life-style a Crime in Progress is not a happy prospect."

Hunter S. Thompson

kaiserhoff's picture

"in order to bail out a few worthless asset managers..."

Mein godt, the truth hurts.  The REIT connection wasn't that obvious at first, but it should have been.  Nice summary.

In related happy news...  Anyone have a take on what's going on with deficiency judgements?  We should be getting a few in by now.  It would be interesting to see how the courts interpret those.  Even in the so-called non-recourse states, I expect plenty of claims based on a whole host of exemptions.  This is a bottom feeders paradise.

Paul Bogdanich's picture

The final betrayal of the electorate by the politicians will get started after the new congress seats.  They will go for a "global" solution that will strip the elecorate of their property rights and perfect the bank's MERS musings.  At least it will be on the Republicans heads this tiem so maybe eventually people will get a clue that both of these parties are two faces of the sme animal.  So if someone ever says to you that what we need is a third party just tell them, "Third?"  How about a second party.

JLee2027's picture

You cannot strip property rights, that's at the state level. There would be an armed revolt over it and I wouldn't give the banksters a chance versus an armed and angry property owner.

Mad Mad Woman's picture

I feel that Barclay's numbers are a little on the low side. It is much higher than that. It has to be. How many times were the same securities re-packaged & sold? How many times did MS repackage that one security?

This is going to be VERY HUGE.

johngaltfla's picture

Fraud doesn't matter as long as Benron is willing to print dollars to buy the crap. And that's all they will buy is CMBS and 10 year notes.


Watch and see.

shortus cynicus's picture

I propose putting MERS database in some steal frame building that suddenly collapse due to

fire from some burning trash cans.


This higher emergency situation motivates congress to pass a bill declaring all MERS transactions legal. Chaos must be avoided at any price!

Just by accident, the firm where all banks outsourced storing paper versions of IOUs will be also located in this building.

Problem fixed.

Last hint: please do not report in MSM that this building collapsed before it collapses.

chistletoe's picture

a friend of mine suggested that

the smithsonian Museum of History and Technology

ought to have a working model of the french guillotine on display ...

gloomboomdoom's picture

I am ready for the junks

Ron Paul is a DEAD WRONG DOOMER. Here is proof...

Ron Paul said he will run for president in 2012 if the dollar collapses (It won't. I promise), so that he can be in place to disassemble the FED and restore the republic

Ron Paul better hope he gets the "Collapse" in 2011. Looks like the FED is jaw boning and is starting to get religion to save the dollar. I really wanted Ron to run. Looks like the worst is behind for the economy though"

got it? The market already knows about "Foreclose Gate". Guess what? NOBODY CARES! People don't want to let it go. Expect it to be swept under the rug after next weeks election.

No "Double-DIp". No nothing! Nothing is coming! There is no "Second Collapse" in store for the US economy. 2008 was a ounce in a CENTURY type event. You will not see that type o f drama that could have 'sparked' the Revolution you are deerly wish to see. Just as history will tell you, BANKERS NEVER LOSE!

The dollar will never die either unless you can convince people that fiat currency is intrinsicly worthless and just because it says 'Ten Dollars' doesn't make it worth more than 'One dollar'

MarketTruth's picture

The US dollar is at 'end game' for the simple fact the Federal Reserve has devalued it so highly. As such, a 'new dollar' or, better still for them, SDR will need to be implemented. Odds are the 'new dollar' will come first and be a transition just as European countries went from their currency to the unified Euro over a period of time. The Federal Reserve and US Mint need to work together as producing coins by the Mint is now very troublesome due to the actual metal used in some coins being too valuable to make minting such coins truly viable/profitable to a large extent.

So the Federal Reserve needs a 'reset' to the new dollar (call it 10:1 so easy math for the simpleton sheeple) and this gives the Federal Reserve more room/time to continue their devaluation before SDR or some other unified currency is introduced.

litoralkey's picture

The market already knows about "Foreclose Gate". Guess what? NOBODY CARES!


You make the critical mistake in your thought process in trusting the underlying assumption that we live in a market where all parties have perfect knowledge of the market. 

This is patently and easily verified as false.

Ruling materially affecting the entire market are being passed out daily by judges across the United States.  The knowledgebase needed for market participants to make rational market decisions is still being adjudicated at this time.

The flood of litigation has not even started yet.  There will be hundreds of class action lawsuits across dozens if not hundreds of jurisdictions.  There will be international lawsuits as MBS investors try to recoup losses.

The market is now bases upon the strength of the barrel of the gun.  Every trader is assuming the gun is under his control facing outward, and will trade as such, until such time as it is irrefutable that the gun is controlled by the opposing party and faced at oneself.

All heil the tyranny of the black robes and fatcats.


count_de_monee's picture

Breaking News - Portugal Update


The PSD (opposition) just announced they will wait until the last day before the budget vote (next Tuesday - vote is Wednesday) before deciding their vote.

Basically this throws the ball back into the government's court and leaves open the possibility of more negotiations until then.

Breaking it down: it's a draw, and we're heading into overtime. I wonder how those CDS will react?

I have a feeling they'll end up abstaining, but that won't really do much of anything to relieve the pressure. And ther's a general strike coming up next month. Should be fun.

HarryWanger's picture

Well it doesn't seem to be affecting BAC. BTW: what happened to all the folks who said you'd be a fool to buy BAC at 11 and change? Yesterday's headlines are forgotten in nanoseconds by traders.

GlassHammer's picture

Did BAC fix its balance sheet problems?


daneskold's picture

This morning Court issued TRO enjoining foreclosure sale by Bank of New York Mellon, BAC Home Loan Servicing, and MERS because of "substantial legal issues" surrounding their ability to proceed with a non-judicial foreclosure in light of the patently forged signature on a substitution of trustee and defect in the notice of default.

The MERS corp assignment of the note and trust deed, substitution of trustee, and notice of default were all notarized by the same notary.  A redaction to one of the acknowledgements was obvious.  Patent defects exist on the face of the documents.

BAC argued that defects in the assignment, the sub/trustee, and the NOD were irrelevant in a non-judicial foreclosure.  The judge felt that there was no difference between submitting a false affidavit to a court in a judical state and relying on a false document in a litigated non-judicial foreclosure.  That ruling was a poser to the BAC attorney.

Best of all, all of the defendants took the position that MERS had substantive rights by virtue of the original note and trust deed.  Woops.

In this state, a note and trust deed constitute a security if not offered and sold as a unit.  There was no qualifying registration filed with the state or federal government for that split of rights.  Thus, the note and trust deed are unregistered securities, and the remedy is that no involved in the making or performance of the note and trust deed may enforce them in any judicial proceeding.

Yes folks, that's right, today's court room action will result in the inability of anyone to enforce the note and trust deed.

kaiserhoff's picture

Well done, thanks.  How long does a TRO run, and what's the next step?  NY state?

StychoKiller's picture

"Wells Fargo acknowledges 'problems' in foreclosure paperwork:"

Anyone else noticing that the slight breezes seem to be picking up speed lately? (Not to mention Volvos, trees, mailboxes, etc?)


Don Smith's picture

LOL of the day - Treasury: Foreclosure woes not systemic threat (Reuters)

JLee2027's picture

Good one!

You know they are worried about a systemic reaction when they run BS like that.

rookie's picture

So let me see if I am following all this …underwriters were supposed to assign the notes and mortgages to the trustee but instead they assigned the mortgages to MERS as nominee and they signed the assignments of the notes or allonges in blank to noone.  Now they either have to go back and assign both the notes and mortgages to the trustee (expensive and REMIC tax issues) or the mbs holders have unsecured securities.  But the bigger question is whether the practice of signing the allonge to the notes in blank allowed them to sell the loans more than once in a ponzi-like scheme like the bank in florida.


If Chris Whalen can say on national tv that they pledged the same loans more than once . . . why are there still no indictments?  It should be pretty simply to prove if the same loan is in more than one mortgage pool

Cognitive Dissonance's picture

I've long thought that this "double and triple selling of notes" is much bigger than even our worse nightmares are telling us.

It explains sooooooooooo much about all the little puzzle pieces that don't seem to fit, but are just sort of floating out there. I believe there was MASSIVE fraud perpetrated by the TBTF banks with the informed consent at the highest levels. This was done not just for greed and control reasons, but to gather huge amounts of money from various sources that could be used without public oversight or knowledge.

I doubt it will all come out, but there is more that will surface before a "political solution" will be announced that will take the USA fully into the Banana Republic column. We've been there for the last decade, but it still hasn't been acknowledged by the majority of the sleeping citizens. It soon will be after the mid-terms have concluded and the shame duck Congressional Critters return for a last hurrah.

rookie's picture

do you think that maybe the state ags just don't get the big picture yet - they are only focused on the fradulent foreclosure documents but not the ponzi part?  maybe they will start to figure out the real fraud under the cover-up fraud.

Cognitive Dissonance's picture

I don't think the state AG's have the big picture yet for several reasons, mostly because when one is part of a large system one has great difficulty seeing beyond the system.

State AG's think in terms of laws and checks and balances. One of the reasons so many legal professionals can't see the systemic fraud and manipulation is because in order to do so, they must completely change their worldview of how the system works and who is working the system.

Most simply can not conceive they "their" system is so hopelessly corrupted by so many layers by so many people. This is why the average Joe has such a difficult time accepting that 9/11 was such a massive fraud connected to so many parts of the system. To accept that 9/11 is a lie is to aceptt that much of what they believe in, are connected to, are a part of, is also a lie.

So much easier for the State AG's to think in terms of rampant fraud by greedy Wall Street types while regulators were corrupted than to begin to question their basic belief systems. We only see what we wish to see. And we won't see any more than we are emotionally capable of seeing. A lawyer will find it very difficult to accept that something they trained many years to participate in and then worked many years to feed themselves in is nothing like what they wish to believe.

It's called a cognitive dissonance and it's usually resolved with denial and selective thinking/seeing/understanding. People who spend their entire lives believing they do not live in a Banana Republic aren't going to admit they do without some serious shocks to the system first. 

rookie's picture

so why don't people like cheyenne and banksouttacontrol (see previous threads on the ponzi part) write a letter to every state ag explaining how the ponzi part would happen (even write the letter anonymously).  there have to be some state ags especially the midwestern ones who would pursue the fraud.  we won't get our capital markets back until we pursue the fraud.

Cognitive Dissonance's picture

Why would any individual state AG go up against the Fed and the Federal government? Why? Because they are doing "good"?Because they are serving the "truth"? When they do go after the Ponzi, do you think the Ponzi will just sit around and let itself be exposed or do you think it will hang the state AG by the balls? Do you have the type of courage your asking of the state AG?

Not beating you up, but just asking fair questions. This won't end until you and me and the old lady across the street and the barber on main street and the 3rd grade school teacher all say they've had enough and demand it stop. Until then, anyone who sticks his or her head out and directly challenges the Ponzi will be killed in every sense of the word.

Only when the people leader with the leaders follow.