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Analysis by: Daniel P. Pennell PMP, LSSGB

Multi Level Analysis in Support of Home Ownership and Title Protection Act ( HB-1506 ) Protecting Homeowners Protecting Investors. Analysis by: Daniel P. Pennell PMP, LSSGB. Bona Fides. Certified Lean Six Sigma (Process & Quality Control) Certified Technical Program & Risk Manager

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Analysis by: Daniel P. Pennell PMP, LSSGB

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  1. Multi Level Analysis in Support of Home Ownership and Title Protection Act( HB-1506 )Protecting Homeowners Protecting Investors Analysis by: Daniel P. Pennell PMP, LSSGB

  2. Bona Fides • Certified Lean Six Sigma (Process & Quality Control) • Certified Technical Program & Risk Manager • Former investment advisor and insurance broker • 16 Years designing and automating legal & business processes in regulated environments • Florida State Supreme Court • Florida 20th & 6th Judicial Circuits • Chubb Insurance • Pharmacia • Other State, Federal and Fortune 500 clients Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  3. Method – Baseline - Constraints & Assumptions Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  4. Research Method • Review published MERS documentation • Review published industry best practices • Review reported process defects • Review published analysis of legal opinions, court testimony and case findings • Other published reports • Expert consultation • Legal • Investment • Financial Risk Analytics • Banking • Property Recordation and Title • The MOST IMPORTAN QUESTION is “WHY?” Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  5. Constraints • Getting direct answers from banks or MERS as to defect rates is impossible because either they do not or are unable to track them or will not release the data. (No Control Chart) • Limited access to data on the variations in servicer processes • Time and Money • Variations in expert opinionlimits analysis to those data points where there is a consensus opinion or collateral support. Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  6. Intent & Spirit of Recordation Laws Assure purchasers ( individuals or businesses) of real property that the person selling the property has the capacity to execute the transaction and discover any encumbrances or liens on the property. To provide transparency to interested members of the public as to the ownership and responsibility for a piece of real property. To provide government with an accurate record of responsibility for taxes and assessments. Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  7. Importance of Transparent and Reliable Recordation • Assure good chain of title for home owners and buyers. • Assure investors that the collateral for their investments is secure and that the investments that they bought actually contained the described notes at the time the trust was closed. (put backs) • Minimize risk to title insurers and thus keep rates down. (title insurers have asked for warranties) Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  8. A Process is in Control • 3.4 defects per million (99.999 % free) • Defect = any process output that does not meet customer specifications • Means to define, measure, and analyze causes of defects • Established procedures for improving the process to correct defects • Established means of change control Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  9. Assumptions • Data and input provided is accurate or valid • A defect is any recordation error that results in an errant seizure of property or loss of chain of title Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  10. Environment and Process Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  11. Highlights of Current Environment • These processes and systems are NATIONAL in scope • The banks have no skin in the game but collect huge fees for creating and selling securities in pools of mortgages. They then collect again for servicing the loans and managing the trusts governing the pools. • The ONLY parties with an economic interest in a given property are the BORROWER and the INVESTOR. • The borrower and the investor are insulated from one another by MERS and by the trust agreements. Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  12. How Borrowers & Investors are Isolated from Each Other By Banks • Investor of Record • Controls Loan Record Access by True Investor Bank as RMBS Trustee Bank Servicer Borrower May also be pooling agent. (True) Investor • May only access loan records with approval of trustee • 25% to 50% share control to force trustee to open records MERS Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  13. The more complex you make something the more likely it is to rip itself apart in spectacular fashion. (A Formula 1 race car is the most technically complex and highest performing automobile in the world until it isn't….the engine will blow apart in one race and the transmission is good for one start.) Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  14. Mortgage Transaction without Securitization or MERS * Sub process involving lender transfer of note and deed not shown. Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  15. Mortgage Transaction w/ Securitization and MERS • 40 Pts of Level One Failure • Repeated data entry of loans and loan values etc.= Chances for Human Error • No identified standards of operation • No unifying change control authority • Multiple Systems with varying control, data entry procedures and requirements Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  16. Never automate a bad process, it just means you can make mistakes faster. Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  17. Some Observed Defects • If the outlined principles in the Ibanez case in MA take hold elsewhere, then the defect rate for securitized mortgages is almost 100%. • BofA has admitted to a 25% document error rate and roughly 4% error rate in forclosure • A BofA attorney admitted in court that Countrywide notes were not transferred to the trusts • NY bankruptcy court found that mortgages were pledged to multiple trusts (multiple trusts trying to foreclose) • A recent analysis of Freddie/Fannie loan portfolios show some pools may have an error rate >50% • Numerous reports of homes without mortgages, on time payment histories being taken. Any of these would satisfy the definition of out of control processes. Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  18. Anecdotal Data • Response to requirements for foreclosing attorneys to sign affidavit affirming that they made reasonable efforts to validate the documentation result in halting of foreclosures. • JP Morgan dropped MERS as foreclosure agent • Title insurers requested warranties of title from the banks on foreclosures. (later backed down but that is likely to change in the wake of the Ibanez decision) • NJ Supreme Court may freeze foreclosures for document and process concerns • Borrowers credit ratings being hit for asking “Who holds the note?” (reported as challenging the debt) Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  19. Judicial Comments “[W]hat is surprising about these cases is … the utter carelessness with which the plaintiff banks documented the titles to their assets.” –Justice Robert Cordy, Massachusetts Supreme Judicial Court (Chief Legal Counsel to republican governor and Corporate Lawyer) “incredible, outrageous, ludicrous and disingenuous.” - Judge Arthur M. Schack of the New York State Supreme Court (Responding to the defense by an attorney of documentation in a foreclosure filing.) Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  20. Robo-SigningWork Around or Cover-up? • Includes FORGING of assignments • Recreating documents and backdating • Auto signing of documents to include final amounts owed. • All this enabled by false notarization (remember notary gate ?)

  21. When a system or process fails you need a work around. Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  22. The Price of Robo-XXXX Lender Processing Services (LPS) Price List (extract) LPS investors are suing for violations of securities law because they claim the CEO misrepresented the extent of the companies exposure for the “robo signing/forgery” liability. Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  23. MERS Specific Issues • Is MERS inherently illegal? • Assumed the role assigned to county government • Would fail to conform to state acquisition rules as a contract • MERS has an identity crisis. It cannot decide if it is…. • A software company • A loan servicing company • A private system of land recordation • Describes itself as a reliable system of record then disclaims responsibility for data quality • Fails to Adhere to Best Practices • User access and control (20k + self appointed VP’s etc. & 50 employees?) • Data quality control • No known auditing procedures. ( 50 employees?) • Lack of transparency (Facilitates securities and tax fraud?) Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  24. Is MERS Inherently Illegal? • State and Federal acquisition law forbids… • Outsourcing inherently governmental tasks (property recordation) • Contractors from making decisions for the government • Committing the government financially ( fees and taxes due) • MERS obtained no government consent at either the state or federal level before commencing operations. • Is its corporate structure legal? • 20,000 officers (employees of other firms) and 50 employees (50 employees = size of small software firm) • No assets (Moody’s Bankruptcy Remote Entity….think response to S&L crisis) • A board that has never met • ZERO Capitalization Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  25. MERS Identity Crisis • At its core, MERS is a small software firm. • It provides an application for the use of banks and mortgage originators. • It denies any responsibility for the quality of the data in the system, in essence denying ownership of the data • It’s fee structure is similar is similar to those of other online transaction support firms • MERS claims to hold no economic interest in the mortgage yet acts like a servicer by acting as the foreclosing party. • MERS and the Bankers claim that MERS is needed because otherwise the county recorders would be overwhelmed but then claim it is NOT a private property recording system. They further claim it works well and then disclaim the quality of the data contained. Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  26. MERS Disclaimer At the bottom of a MERS search, the following disclaimer is posted. “MERS makes no representations or warranties regarding the accuracy or reliability of the information provided. MERS disclaims responsibility or liability for errors, omissions, and the accuracy of any information provided. MERS does not input any of the information found on the MERS® System, but rather the MERS Members have that responsibility regarding mortgage loans in which they hold an interest. Users of this information have the responsibility to verify the accuracy, currency and completeness of the information. The information does not constitute the official legal record and is for informational purposes only. The servicer listed should be contacted for further information” Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  27. MERS Identity Crisis • At its core, MERS is a small software firm. • It provides an application for the use of banks and mortgage originators. • It denies any responsibility for the quality of the data in the system, in essence denying ownership of the data • It’s fee structure is similar is similar to those of other online transaction support firms • MERS claims to hold no economic interest in the mortgage yet acts like a servicer by acting as the foreclosing party. • MERS and the Bankers claim that MERS is needed because otherwise the county recorders would be overwhelmed but then claim it is NOT a private property recording system. They further claim it works well and then disclaim the quality of the data contained. Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  28. Other Relevant Data Points • The FDIC, OCC, Treasury and the Federal Reserve are examining these issues now and have had agents on site at the major servicers and 3rd party providers (including MERS) • The NJ Supreme Court has threatened to freeze all foreclosures unless the major servicers can prove to the court that their processes are sound and not reliant on fraudulent documentation. • The Florida AG just lambasted the broad use of forged and robo-signed documents in the state by banks, law firms and other 3rd party providers. • There are class actions by STATES against MERS in CA, NV, TN and 14 others under seal. • It was/is standard practice of the banks to assign notes in blank and to assume ownership of notes AFTER foreclosure. Ibanez invalidated both concepts. Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  29. Conclusions – Opinions - Recommendations Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  30. Conclusions • The current reliance on the MERS system poses serious risk to investors, home buyers and homeowners. • The processes and systems in question are opaque and solid data hard to gather but observed defects, published information and court testimony indicate a serious rate of defects, processes that are out of control and substantive violations of best practices. • The current process violates the spirit and intent of the property recordation laws if not the letter of the laws and may indirectly facilitate securities fraud. • The processes and practices in question must result from one or both of the following… • Poor assumptions, planning and execution • Intentional desire to obfuscate Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  31. Opinion • It would appear likely that the MERS process will be found to be illegal in some structural way across enough of the country that the system will die on the vine. The MERS CEO seems to recognize this when he suggested that the firm is prepared to fill the role of a FEDERAL land recording system. • To advocate that this bill should not pass because the banks may not be able to prove chain of title in some cases is to… • Approve the sale of foreclosed properties to new buyers with an existing bad title • To advocate for a two tier legal system (one for banks and one for individuals) • To indirectly facilitate the covering up of potential securities fraud • To validate the use of fraudulent documentation in legal proceedings • Validate the idea that badly run businesses should be protected where they are either too big or too important to fail Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  32. Recommendations • HB-1506 should be approved but it does not go far enough. The recording requirement should include all VA mortgages. • Given the track record of the banks and 3rd party service providers related to the use of falsified documents in foreclosures the penalties should not be struck from the bill and are a vital necessity. • The 45 day requirement should be a minimum. Anyone who has ever had to move a family of four (particularly if they are working simultaneously) can tell you that doing it in 60 days is a stretch never mind 14. Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

  33. HB-1506 Protects… • Homeowners by assuring due process and against future claims • Investors by validating the collateral backing RMBS • Protects Future Purchasers of Foreclosed Properties from claims • The integrity of the land recordation and legal process. Multi-Level Analysis in Support of HB-1506 / Pennell / 17 January 2011 / VA House of Delegates

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