Love, death and foreclosure

Lenders all failed or nearly did
Because they made so many loans like those provided to Vargas — and others that were even more reckless — Downey and Washington Mutual failed and were seized by federal regulators last year. The collapse of WaMu, with $307 billion in assets, was by far the largest bank failure in U.S. history.

The parent company of World was taken over by Wachovia in 2006 in a move that is now widely seen as a big contributor to Wachovia’s failure and seizure last year. Countrywide was bought by Bank of America last year while on the brink of failure. It was subsequently sued by a dozen states over its predatory practices before BofA settled.

Representatives who work for the successor companies of World, Countrywide and WaMu all said they could not comment on specifics of Vargas’ case because of customer privacy concerns. Some of them said it is now widely accepted that mortgage brokers, like those who handled all of Vargas’ loans, often lied about borrowers’ income and other aspects of the deals.

A WaMu spokeswoman said the company, which was taken over by Chase, no longer accepts loans from mortgage brokers. Downey, which did not respond to msnbc.com’s inquiries, last year filed dozens of lawsuits that accuse mortgage brokers, borrowers and appraisers of lying on loan applications.

The high cost of Freedom
The final two loans on Vargas’ house were made by Freedom Home Mortgage Corp. of New Jersey, a first loan of $630,000 and a second of $115,000. They were made Oct. 3, 2006, and obligate him to pay over $3,700 a month — well more than double his income. Within months, he was unable to keep up with the payments. By early last year, foreclosure had begun.

Vargas, who spends a good part of each day watching TV news, said, he only recently came to comprehend that side of the vast financial scheme he was caught up in.

“God opened up my eyes” about what lies beneath the mortgage meltdown, he said. “He showed me what they were doing. They got all these loans and put them in the stock market in bundles. It’s incomprehensible.”

Indeed, Vargas' refinancing nightmare occurred during the peak years of mortgage securitization, the technique Wall Street used to turn home loans into bonds for sale to investors. Securitization in that time frame is now blamed for literally lavishing money on homeowners and buyers, often via predatory and subprime loans, and thus fueling housing inflation across the nation. And while lenders may not have considered Vargas a subprime borrower based on what mortgage brokers told them, his actual finances certainly made him one.

'Securitization meat grinder'
“A lot of the subprime lending, particularly the predatory loans, would not have occurred if the lenders had not been able to dump those loans into the securitization meat grinder,” said Bert Ely, a Cato Institute scholar and an expert on financial regulation.

Millions of those borrowers, like Vargas, are in the thick of foreclosure proceedings. Millions more have lost their homes.

Vargas got word in a letter last April 4 that MERS planned to auction the house three weeks later in a bid to regain what it said was owed in connection with the first mortgage. He retained attorney Gomez of nearby Norwalk, who rushed Vargas into bankruptcy court, a move that automatically stops, or stays, attempts to collect debts, including foreclosure.

Creditors in bankruptcy cases are allowed to seek removal of such stays, and that’s what MERS did, retaining attorney Mark T. Domeyer.

However, Gomez and Judge Bufford of the U.S. Bankruptcy Court for the Central District of California wanted to know what right MERS had to demand the keys to Vargas’ house. After all, the loan in question had been made by Freedom, the New Jersey lender.

Domeyer’s court filings included copies of Freedom’s mortgage documents naming MERS as “beneficiary” of the deed of trust, or mortgage, on Ray’s house.

The use of MERS as a “nominee” of the lender and “beneficiary” of mortgages is key to the company’s business model, described on its Web site as “an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. … MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.”

In other words, when a loan in the MERS registry is sold by one party to another, instead of filing paper “assignments” at the local government office where the mortgage is recorded, the transaction is simply noted by MERS. Similarly, foreclosures and other events are supposed to be noted in MERS’ records on each loan.

57 million mortgages
With more than 3,000 member companies and 57 million registered mortgages covering about 50 percent of all new loans, the 45-employee MERS controls and disseminates information on loans made to a majority of American homeowners. MERS would not disclose how many foreclosure cases it is currently bringing.

In a press release in May 2007 when it announced the registration of its 50 millionth mortgage, MERS said it had saved the mortgage industry $1 billion since it was founded in 1996.

But consumer advocates see the company in a darker light, arguing that another purpose of MERS is to obscure ownership of loans, allowing investors to buy, sell and foreclose on them in unethical and illegal ways. Also unhappy are local government officials who miss out on assignments and recording fees.

Attorneys who defend homeowners in foreclosure say the procedure is reserved for the actual owner of the loan, also called a note. “The party who can bring a foreclosure proceeding has got to be the party that proves it actually owns the note and that note has been properly negotiated all the way up the line,” said O. Max Gardner III, a bankruptcy attorney from North Carolina and a dean of the U.S. debtor bar.

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