Loan registry raises legal questions: MERS

Excellent Article on MERS

Loan registry raises legal questions

Foreclosures » Courts, legal scholars question company’s role.

By Tony Semerad

Updated: 04/24/2010 11:18:14 PM MDT

 

A small real estate data-management company is the focus of a widening legal controversy that could affect millions of U.S. foreclosures, including thousands filed against distressed homeowners in Utah.

The nation’s largest lenders created Mortgage Electronic Registration Systems (MERS), of Reston, Va., in 1994 as a loan registry designed to save millions of dollars on paperwork and recording fees. By registering mortgages with the private computer-tracking system and, in effect, putting loans under MERS’ name, lenders could avoid having to file public documents each time a mortgage was bought and sold.

The arrangement served its purpose well as markets went up. By MERS’s own estimates, it saved mortgage lenders more than $1 billion during a decade, and the efficiencies it brought to mortgage trading played a key role in the growth of mortgage-backed securities and the housing boom.

But with the economic downturn and crush of foreclosures, MERS is now showing up on tens of thousands of foreclosure notices sent to delinquent homeowners, including nearly 3,000 sent in Utah since July 2008, most of them in Salt Lake County.

Here and nationally, the company’s legal status as a party in these actions is increasingly being challenged.

“This is one of the buried, yet-to-emerge bombs in the whole mortgage crisis,” said Christopher Peterson, a University of Utah law professor and author of the first scholarly analysis of MERS and its legal underpinnings, to be published this spring in the University of Cincinnati Law Review . “This has the potential to fundamentally affect the trajectory of our recovery.”

‘A tax evasion broker’ » MERS officials vigorously disagree, but Peterson contends the MERS system has violated a deep-seated principle of American law — transparency in land-ownership transactions — by effectively removing much of that information from the public record. In so doing, Peterson says, MERS also has served as “a tax evasion broker,” denying counties millions of dollars in recording fees — revenue that might otherwise have funded essential public services.

And now, by allowing actual lenders to pursue foreclosures under MERS’ name instead of their own, Peterson says the company is acting as a “foreclosure doppelganger.”

“Throughout history, executioners have always worn masks,” the U. professor writes in his article, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System .

“In the American mortgage lending industry, MERS has become the veiled man wielding the home foreclosure ax.”

‘Lucky ones …are …with MERS’ » A MERS official played down the controversy, saying that without MERS, the current real estate meltdown would be much worse. Its process makes mortgage data more accurate and reliable, while reducing errors and keeping costs low, spokeswoman Karmela Lejarde said.

Lenders initiate foreclosures under the name of MERS, which functions as an industry utility, she said. Parties to a MERS action have full access to the ownership trail through the MERS registry, Lejarde said.

“We’re all for systematic tracking and transparency,” she said. “It’s the lucky ones whose loans are registered with MERS and are able to track down what happened.”

As more and more homeowners and their lawyers fight foreclosure, courts are having to weigh in, and in some cases, their interpretations conflict. Given the numbers at stake — the MERS registry holds an estimated 60 million U.S. mortgages — many in the industry have a sense of foreboding.

“This could be the scam from hell,” Salt Lake County Recorder Gary Ott said.

Legal issues aside, MERS has complicated and even thwarted efforts by some homeowners in foreclosure as they seek to contact and negotiate with whomever legitimately holds their loan.

“They don’t know who their investor is and the lender won’t always tell them,” said Kristin Johnson, chairwoman of the Housing Education Coalition of Utah and a foreclosure-prevention counselor. “If you don’t know who their investor is, how do you get resolution for the homeowner?”

Peterson and others warn the system may also be derailing efforts to track down and prosecute shady lending practices.

Representatives of the Utah lending community say use of the loan registry has been standard operating procedure, endorsed of government backed agencies such as Fannie Mae and Freddie Mac, which were instrumental in MERS’ creation.

And all of the participants in the mortgage boom — home buyers, lenders, loan servicers and real-estate companies — benefited from savings that MERS generated, according to Julia Borst, president of the Utah Mortgage Lenders Association, a trade group for lenders.

In terms of using technology to modernize the processing of mortgages, “it all makes sense for this to have been set up,” said Cleon Butterfield, chief financial officer for the Utah Housing Corporation, a state-backed lending agency.

Yet, virtually everyone agrees the company’s role has been radically transformed by the mortgage collapse.

“MERS was intended to be a repository of all these records, but it turned into something else,” said Rick Sharga, senior vice president for RealtyTrac, which tracks foreclosures nationwide. “They became the foreclosing party of record and it’s hard to argue logically that a registry should be a foreclosing party of record.”

‘Patch-up job’ » Amid the current explosion in foreclosure actions across the country, courts in Nevada, Florida, Minnesota and elsewhere have upheld MERS standing as a foreclosing party. MERS also points to a 2009 federal case in Utah that affirmed its authority to exercise certain legal powers accorded to the lender, including the right to foreclose.

But several MERS foreclosures have bogged down when parties could not produce the original loan or “blue-ink” documents on judicial demand. In September, the Kansas Supreme Court ruling took a dim view of the idea of a “nominee” of the lender filing foreclosures — a position that some observers see as hostile to the MERS approach.

The New York Times quoted University of Missouri law professor Patrick Randolph as saying, “The entire structure of MERS as recorded nominee could collapse in Kansas, and that could lead to a patch-up job where they would have to run around and re-record the mortgages.”

Homeowners in Delaware, meanwhile, have filed a class-action lawsuit against MERS, over what they claim are fraudulent fees charged by lenders seeking to foreclose under the MERS name.

Lejarde, the MERS spokeswoman, said the company’s practices have not been significantly affected by the cases.

It’s a bloody mess » In Utah, where foreclosure rates are dramatically outpacing the national average, cases already are bubbling up in state and federal courts that raise issues regarding MERS’ role.

“There is a flaw in the system that was set up by the stakeholders,” said Salt Lake City attorney Walter Keane, who is pushing several such cases. “Anyone could use these arguments.”

Some predict severe economic consequences if MERS’ role in foreclosures is undercut. Lenders will have no choice but to tighten credit if their ability to foreclose on delinquent loans is hampered, said Borst, of the Utah Mortgage Lenders Association.

With bank bailouts, federal regulators are hammering on foreclosing banks to be consistent from state to state, she said. Combine that with a coming foreclosure surge and state courts taking divergent positions on who has the right to foreclose, Borst said, “and it’s a bloody mess. There’s no other way to put it.”

tsemerad@sltrib.com

Loan registry raises legal questions

What is MERS?

MERS, or Mortgage Electronic Registration Systems, is a small Virginia-based company created by the lending industry in 1994 to register and track home mortgages.

The registry allowed lenders to avoid having to file public documents and pay fees each time a mortgage changed hands, but with the real estate collapse, MERS now is initiating millions of foreclosure actions nationally, prompting legal questions about its role.

The Salt Lake Tribune

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2 Responses

  1. MERS submitted the following Salt Lake Tribune Letter to the Editor. We have not yet learned whether they will publish it.

    “The Tribune’s April 24 article on MERS was filled with errors and missing facts—facts that we had provided to the writer before the article was published.

    Contrary to the article’s assertion, MERS does not remove land ownership information from public records because that information was never there to begin with. MERS fills an information void that the county records have never provided. We track the changes in servicing rights and note ownership, and we have helped numerous homeowners find their note owner. In fact, homeowners can contact their mortgage company through MERS and MERS can connect them with the note owner of their mortgage loan when the owner has agreed to be disclosed.

    The borrower makes MERS the mortgagee with 100% transparency because they sign a document at closing acknowledging that MERS is the mortgagee. MERS also has a rule requiring that the note be presented at foreclosure.

    Finally, the author failed to disclose that the article’s chief MERS critic, Christopher Peterson, is currently employed as a witness against MERS in a pending legal matter. This article provided a disservice to Tribune readers and they deserve better.”

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