A guide to understand how far reaching the MERS Mess will reach.

1. How Damaging is MERS Mess or The Dog Ate the DEED By Mike Morrison, CNE Will & Will Real Estate Brokers

2. A Giant Assumption I’m going to do something I usually don’t do. I’m going to assume that RE Agents are familiar with the current problem with the firm named MERS. That aside, some of you may have read The Tipping Point by Malcolm Gladwell or Tabel’s Black Swan Theory . Both are very relevant regarding the Housing Market. I feel many agents don’t fully grasp the gravity of what some are calling a paperwork glitch or a temporary pause with foreclosures and short sales. My point is the fraud perpetrated on our court system regarding Lender standing in foreclosure proceedings is merely the “Tipping Point” that will expose the dire condition of the US Banking System and the effect on the Housing Market. MERS was formed for one thing: Securitization . It’s not the real estate that is securitized, it’s the cash flows generated as borrowers pay their mortgages each month paid to the holders of Mortgage Backed Securities ( Derivatives)

3. What is a Derivative ? To begin to understand how damaging the MERS Mess is and how it affects the Housing Market & the Economy we need to understand fundamental concept used to create so called Mortgage Backed Securities. Derivative = The Lender is worried that the crap loans they made will default at some point. The Lender transfers (sells) a portion of the risk to another party. Think of it as an insurance policy. The derivative the Housing Market should be worried about is the Credit Default Swap and the Mortgage Backed Security. Here’s the great part, the buyer of the risk doesn’t have to have the cash to cover the default when the CDS is sold. The sale of Derivatives was done OTC (Over The Counter) and for the most part unregulated.

5. The Mortgage Backed Security Fig. 1 Courtesy of Wade T. Brooks

7. The Credit Default Swap Simple Terms This can get VERY confusing because we as agents think of Sellers & Buyers in a different frame than Sellers & Buyers of CDS. So bare with me. A CDS is a contract between a Bond Holder (Bank) and a Seller (Bank, Pension Fund, Hedge Fund, Ins. Co…) against default by the Bond Issuer. These contracts can be private or public. Not Regulated. How They Work The "buyer" of the CDS holds the bond (MAYBE) and pays the "seller" of the CDS a periodic premium, just like an insurance premium but it’s not insurance; in exchange, if the bond issuer defaults, the seller of the CDS agrees to buy the bond from the buyer at face value. Remember AIG & Lehman Brothers ? These little gems took Lehman down and almost took AIG down.

8. The Credit Default Swap So lets see what happens in the case of MBS default The Seller of the Credit Default Swap has agreed to pay the Buyer of the Credit Default Swap the Face Amount of the Bond . So say the MBS face amount is $1.00 but, it’s now only worth .03 Cents. The Seller of the CDS is down $0.93. And remember, the Seller of the CDS did not have to have $1.00 to cover the MBS face amount when he sold the CDS. So, what do we have now? Bag Holders. The MBS is worthless and the CDS is worthless. Oh, the inventor of the CDS, none other than Fannie, Freddie & JP Morgan Chase. So you can see how the battle lines being drawn. Who owns the Loan? CRAP LOANS=CRAP BONDS

9. CDS GRAPHICS Fig. 2 I hope you can see the monumental screw up a clouded Title can cause in the CDS Market Alone

10. CDS GRAPHICS Fig. 3 Source: OCC Call Report Note the chart on the left is the make up of Credit Derivative Obligations of 1064 US Banks. CDS makes up 97.14% of the total! Note the chart on the right, 34% of the CDO’s are Non-Investment Grade=Junk Total Outstanding MBS, CDS and other Credit Derivative Obligations for Q2 2010 $223.4 Trillion Dollars

11. Outstanding MBS Fig 4 The US Govt. owns 32% of all outstanding MBS thru Fannie &Freddie

14. Contact Me I invite your comment or contact Mike Morrison [email_address] I am not an attorney, just a real estate agent. The info contained in this presentation is for educational purposes only. No investment advice is offered.