Tracking Loans Through a Firm That Holds Millions: MERS

Kevin P. Casey for The New York Times: Darlene and Robert Blendheim of Seattle are struggling to keep their home after their subprime lender went out of business.

By MIKE McINTIRE NYTimes
Published: April 23, 2009

Judge Walt Logan had seen enough. As a county judge in Florida, he had 28 cases pending in which an entity called MERS wanted to foreclose on homeowners even though it had never lent them any money.

Into the Mortgage NetherworldGraphicInto the Mortgage Netherworld

MERS, a tiny data-management company, claimed the right to foreclose, but would not explain how it came to possess the mortgage notes originally issued by banks. Judge Logan summoned a MERS lawyer to the Pinellas County courthouse and insisted that that fundamental question be answered before he permitted the drastic step of seizing someone’s home.

Daniel Rosenbaum for The New York Times R. K. Arnold, MERS president, said the company helped reduce mortgage fraud and imposed order on the industry.

“You don’t think that’s reasonable?” the judge asked.

“I don’t,” the lawyer replied. “And in fact, not only do I think it’s not reasonable, often that’s going to be impossible.”

Judge Logan had entered the murky realm of MERS. Although the average person has never heard of it, MERS — short for Mortgage Electronic Registration Systems — holds 60 million mortgages on American homes, through a legal maneuver that has saved banks more than $1 billion over the last decade but made life maddeningly difficult for some troubled homeowners.

Created by lenders seeking to save millions of dollars on paperwork and public recording fees every time a loan changes hands, MERS is a confidential computer registry for trading mortgage loans. From an office in the Washington suburbs, it played an integral, if unsung, role in the proliferation of mortgage-backed securities that fueled the housing boom. But with the collapse of the housing market, the name of MERS has been popping up on foreclosure notices and on court dockets across the country, raising many questions about the way this controversial but legal process obscures the tortuous paths of mortgage ownership.

If MERS began as a convenience, it has, in effect, become a corporate cloak: no matter how many times a mortgage is bundled, sliced up or resold, the public record often begins and ends with MERS. In the last few years, banks have initiated tens of thousands of foreclosures in the name of MERS — about 13,000 in the New York region alone since 2005 — confounding homeowners seeking relief directly from lenders and judges trying to help borrowers untangle loan ownership. What is more, the way MERS obscures loan ownership makes it difficult for communities to identify predatory lenders whose practices led to the high foreclosure rates that have blighted some neighborhoods.

In Brooklyn, an elderly homeowner pursuing fraud claims had to go to court to learn the identity of the bank holding his mortgage note, which was concealed in the MERS system. In distressed neighborhoods of Atlanta, where MERS appeared as the most frequent filer of foreclosures, advocates wanting to engage lenders “face a challenge even finding someone with whom to begin the conversation,” according to a report by NeighborWorks America, a community development group.

To a number of critics, MERS has served to cushion banks from the fallout of their reckless lending practices.

“I’m convinced that part of the scheme here is to exhaust the resources of consumers and their advocates,” said Marie McDonnell, a mortgage analyst in Orleans, Mass., who is a consultant for lawyers suing lenders. “This system removes transparency over what’s happening to these mortgage obligations and sows confusion, which can only benefit the banks.”

A recent visitor to the MERS offices in Reston, Va., found the receptionist answering a telephone call from a befuddled borrower: “I’m sorry, ma’am, we can’t help you with your loan.” MERS officials say they frequently get such calls, and they offer a phone line and Web page where homeowners can look up the actual servicer of their mortgage.

In an interview, the president of MERS, R. K. Arnold, said that his company had benefited not only banks, but also millions of borrowers who could not have obtained loans without the money-saving efficiencies it brought to the mortgage trade. He said that far from posing a hurdle for homeowners, MERS had helped reduce mortgage fraud and imposed order on a sprawling industry where, in the past, lenders might have gone out of business and left no contact information for borrowers seeking assistance.

“We’re not this big bad animal,” Mr. Arnold said. “This crisis that we’ve had in the mortgage business would have been a lot worse without MERS.”

About 3,000 financial services firms pay annual fees for access to MERS, which has 44 employees and is owned by two dozen of the nation’s largest lenders, including Citigroup, JPMorgan Chase and Wells Fargo. It was the brainchild of the Mortgage Bankers Association, along with Fannie MaeFreddie Mac and Ginnie Mae, the mortgage finance giants, who produced a white paper in 1993 on the need to modernize the trading of mortgages.

At the time, the secondary market was gaining momentum, and Wall Street banks and institutional investors were making millions of dollars from the creative bundling and reselling of loans. But unlike common stocks, whose ownership has traditionally been hidden, mortgage-backed securities are based on loans whose details were long available in public land records kept by county clerks, who collect fees for each filing. The “tyranny of these forms,” the white paper said, was costing the industry $164 million a year.

“Before MERS,” said John A. Courson, president of the Mortgage Bankers Association, “the problem was that every time those documents or a file changed hands, you had to file a paper assignment, and that becomes terribly debilitating.”

Although several courts have raised questions over the years about the secrecy afforded mortgage owners by MERS, the legality has ultimately been upheld. The issue has surfaced again because so many homeowners facing foreclosure are dealing with MERS.

Advocates for borrowers complain that the system’s secrecy makes it impossible to seek help from the unidentified investors who own their loans. Avi Shenkar, whose company, the GMA Modification Corporation in North Miami Beach, Fla., helps homeowners renegotiate mortgages, said loan servicers frequently argued that “investor guidelines” prevented them from modifying loan terms.

“But when you ask what those guidelines are, or who the investor is so you can talk to them directly, you can’t find out,” he said.

MERS has considered making information about secondary ownership of mortgages available to borrowers, Mr. Arnold said, but he expressed doubts that it would be useful. Banks appoint a servicer to manage individual mortgages so “investors are not in the business of dealing with borrowers,” he said. “It seems like anything that bypasses the servicer is counterproductive,” he added.

When foreclosures do occur, MERS becomes responsible for initiating them as the mortgage holder of record. But because MERS occupies that role in name only, the bank actually servicing the loan deputizes its employees to act for MERS and has its lawyers file foreclosures in the name of MERS.

The potential for confusion is multiplied when the high-tech MERS system collides with the paper-driven foreclosure process. Banks using MERS to consummate mortgage trades with “electronic handshakes” must later prove their legal standing to foreclose. But without the chain of title that MERS removed from the public record, banks sometimes recreate paper assignments long after the fact or try to replace mortgage notes lost in the securitization process.

This maneuvering has been attacked by judges, who say it reflects a cavalier attitude toward legal safeguards for property owners, and exploited by borrowers hoping to delay foreclosure. Judge Logan in Florida, among the first to raise questions about the role of MERS, stopped accepting MERS foreclosures in 2005 after his colloquy with the company lawyer. MERS appealed and won two years later, although it has asked banks not to foreclose in its name in Florida because of lingering concerns.

Last February, a State Supreme Court justice in Brooklyn, Arthur M. Schack, rejected a foreclosure based on a document in which a Bank of New York executive identified herself as a vice president of MERS. Calling her “a milliner’s delight by virtue of the number of hats she wears,” Judge Schack wondered if the banker was “engaged in a subterfuge.”

In Seattle, Ms. McDonnell has raised similar questions about bankers with dual identities and sloppily prepared documents, helping to delay foreclosure on the home of Darlene and Robert Blendheim, whose subprime lender went out of business and left a confusing paper trail.

“I had never heard of MERS until this happened,” Mrs. Blendheim said. “It became an issue with us, because the bank didn’t have the paperwork to prove they owned the mortgage and basically recreated what they needed.”

The avalanche of foreclosures — three million last year, up 81 percent from 2007 — has also caused unforeseen problems for the people who run MERS, who take obvious pride in their unheralded role as a fulcrum of the American mortgage industry.

In Delaware, MERS is facing a class-action lawsuit by homeowners who contend it should be held accountable for fraudulent fees charged by banks that foreclose in MERS’s name.

Sometimes, banks have held title to foreclosed homes in the name of MERS, rather than their own. When local officials call and complain about vacant properties falling into disrepair, MERS tries to track down the lender for them, and has also created a registry to locate property managers responsible for foreclosed homes.

“But at the end of the day,” said Mr. Arnold, president of MERS, “if that lawn is not getting mowed and we cannot find the party who’s responsible for that, I have to get out there and mow that lawn.”

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Homeowners strike back at banks: The Daily Tribune

“None of the named defendants have the right or authority to foreclose under (state law) or by contractual right,” he says in the lawsuit.

Published: Tuesday, May 11, 2010

By Jameson Cook, Daily Tribune Staff Writer

Ziyad Kased, left, and May Brikho, both of the Michigan Loan Compliance Advisory Group in Troy, talk to client Mahir “Mark” Salmo, 47, of Sterling Heights, one of 88 plaintiffs in two lawsuits in Oakland and Macomb counties alleging deceptive lending practices against more than two dozen banks. (Craig Gaffield/Daily Tribune)

Lawsuits filed in maneuver to try to stop foreclosure, recover losses from alleged overpayments, improper approval.

About 90 homeowners in Oakland and Macomb counties have accused more than two dozen banks of deceptive lending and other wrongdoing by approving loans far exceeding the plaintiffs’ ability to pay and charging excessive fees, among other allegations.

The accusations are levied in two lawsuits filed in each county’s circuit court within the past two weeks through the Troy-based Michigan Loan Compliance Advisory Group Inc., created to help homeowners in trouble with their mortgages. A third lawsuit with about 10 plaintiffs is expected to be filed in Wayne County Circuit Court this week.

The lawsuits represent an emerging tactic nationwide for struggling homeowners in their attempt to fight off potential foreclosure and gain relief on stifling mortgages from some of the country’s largest banks.

The plaintiffs’ representatives say the banks benefited from federal bailout money while few homeowners are getting help through federal loan modification programs.

“They (the plaintiffs) are victims of deceptive lending. They just want to save their homes,” said May Brikho, senior consultant at Michigan Loan Compliance. “They have tried to reach out to the banks, but the banks just don’t care.”

“The banks created these problems. They should’ve known better. These were all subprime loans. The banks knew they weren’t going to last.”

She noted the ubiquitous effect of the housing crisis. “These are problems that affect everybody.”

Of four banks contacted Thursday, Citimortgage and Bank of America banks indicated they had not been served with one or both lawsuits, so declined comment. Wells Fargo and Chase banks did not respond to a media inquiry.

Joe Bosogno, who operates a similar organization to Michigan Loan Compliance in New Jersey, blames mortgage brokers who worked for banks and mortgage companies for inflating applicants’ income so the mortgages could be sold as an investment device. The sale of subprime loans as investment devices contributed to the nation’s economic collapse.

“This (deceptive lending) was going on all over the country,” Bosogno said. “A number of attorneys are stepping up right now and doing aggregate lawsuits. It’s become a nightmare for the banks.”

Michigan Loan Compliance’s attorney, Ziyad Kased, in the lawsuits calls the banks’ actions “intentional and malicious,” and says the plaintiffs “have suffered substantial economic losses, loss of title and slander of title to the credit rating.”

The lenders “and their underwriters of such loans intentionally deceived the mortgagors by conspiring to promote unaffordable mortgages by companies that had direct ties to investment banks that profited from promoting and selling such debt instruments to innocent investors at everyone’s expense,” Kased said.

The loans depicted in the lawsuits range from $100,000 to $388,000 in Macomb and $87,000 to $809,000 in Oakland, with the bulk ranging from about $150,000 to $350,000.

None of the 88 plaintiffs representing 78 loans in the two counties have yet lost their homes and all are trying to prevent foreclosure. The majority of plaintiffs in Macomb currently reside in homes in Sterling Heights, Warren and Shelby Township. A majority of the Oakland plaintiffs live in West Bloomfield, Commerce Township and Farmington Hills.

The plaintiffs, who obtained the loans between 1995 and 2008, are still making payments despite their struggles.

“We advise our clients to continue to make their payments, but it’s their choice,” Brikho said.

A majority of the plaintiffs emigrated here from the Middle East, and some don’t speak English. Brikho said that while the banks may have taken advantage of that situation, it is only a secondary issue, as many of the plaintiffs are U.S. born.

Michigan Loan Compliance charges clients a fee for services. The organization is also using the courts to help other clients already in a pre-foreclosure fight losing their homes, Brikho said.

Kased said he expects the banks will try to get the cases moved to federal court, where he said bank lawyers believe they can receive better treatment and “drag it out” via legal maneuvers. Kased said he will oppose the transfer. He said he believes the cases should remain in each county since each region’s real estate market differs.

Most of the plaintiffs had their incomes inflated by a substantial amount, Kased said. The industry standard for debt to income ratio is 31 to 38 percent. The ratios of the plaintiffs far exceed that range, going from 68 percent to 714 percent, with most being between 100 and 200 percent in Macomb, and 36 percent to more than 1,000 percent in Oakland, where the differences range wider, several below 100 percent and several above 400 percent, according to the lawsuit.

In many cases, the lender or broker added income of a borrower’s family member who was not part of the loan and/or failed to learn of underreported expenses, Brikho said.

The borrower’s financial situation in most cases has worsened since then, due to job loss or reduction, she said.

One of the plaintiffs is Mahir “Mark” Salmo, 47, of Sterling Heights, and his wife, Thaira. They are suing PNC Bank for the $100,000 loan they received in 1997 before PNC acquired National City Bank.

The bank OK’d Salmo’s loan based on him earning nearly $4,000 per month, he said. In fact, he was earning $1,218 per month, he said.

“They asked me a few personal questions and I answered them,” he said. “I didn’t think I would get it. I couldn’t believe when I got it a couple of days later.”

Salmo in 2003 was given a $250,000 line of credit based only on his high credit score and his home being appraised at $415,000, he said.

He used the money to buy two businesses — a Tubby’s shop in Oak Park and a Wireless Communications store in Sterling Heights. The businesses closed, and Salmo said he lost $300,000.

“I lost both of them because the economy went down,” he said. “I had high rent and couldn’t keep up. I tried to work the landlord, but they wouldn’t budge. Now I have nothing. Everything I have worked for, for 35 years, is gone.”

He is now saddled with an approximately $1,000 monthly payment on the original loan and $600 per month for the equity loan, which is interest-only.

His home value has dropped significantly. He owes $30,000 on the original loan and $230,000 on the second loan.

“I should never have gotten that money,” he said of the second loan. “It’s like a bad dream.”

He said it hurts him most that he can’t financially help his mother, a homeowner who also is a plaintiff.

Salmo is thankful that his wife and three children aged 21 to 24 are working and supporting him, allowing him to make payments.

Salmo, a Chaldean, has lived in the United States for 35 years and said he still loves America despite his problems.

“This is the greatest country in the world,” he said.

Salmo’s interest-only loan is an example of how the banks committed homeowners to mortgages they eventually wouldn’t be able to honor; the real estate bubble that was bound to burst, Sosogno said.

Bosogno said a worse option given to some homeowners, including at least one in the Macomb lawsuit, was “negative amortization” mortgages in which the balance actually increases despite payments.

On top of the original loans, 22 plaintiffs in the Macomb case and 26 in the Oakland case obtained second loans that also were awarded deceptively, the lawsuit says.

The lawsuits ask the judges to make the mortgages “null and void.” Kased argues that the courts have determined that the mortgages should not have been assigned, so the mortgage note holders “in reality own nothing.”

“None of the named defendants have the right or authority to foreclose under (state law) or by contractual right,” he says in the lawsuit.

The plaintiffs allege the banks charged “outrageous” fees for origination, loan discount, appraisal, document preparation, broker processing, lender underwriting and yield to premium, “to name a few,” the lawsuit says. APPRAISAL FRAUD??

The plaintiffs, according to the lawsuit, “were never advised of the split charges and excess interest rate differentials split between the broker and the original lender, they were not informed of various costs that were overinflated as shown on the HUD settlement statements.”

The plaintiffs also weren’t told details of variable rate loans, the lawsuit says.

In years after the mortgage was executed, the defendants failed to respond to the “qualified written request” complaint as required by law to do so, the lawsuit says.

The lawsuit seeks compensatory damages for actual loses and exemplary damages for experiences such as mental anguish and humiliation.

The Macomb case was assigned to Judge John Foster and the Oakland case was assigned to Judge Colleen O’Brien.