Here is another story on the fallout of the mortgage fraud/moratorium issue, and could have huge implications throughout the industry, questioning a core practice that affect millions of loans.
The idea that “robo-signers” may have dashed off thousands of foreclosures without verifying them is unsettling enough.
But underlying many of those claims is a deeper legal question, one that challenges the validity of a key tool of the modern mortgage industry. In courts across the country, lawyers who challenge foreclosures have attacked the role of Mortgage Electronic Registration Systems Inc., or MERS.
MERS was created in the 1990s to make it easier for lenders to sell mortgages to other lenders or investors. Under the privately owned system, lenders list MERS on the loan documentation in place of the actual owner. That allows the loan to be sold over and over without having to record the new assignment at the local county courthouse. MERS says it is involved in about 64 million home loans.
But lawyers claim the system that made it easier to sell loans has also made it difficult to figure out who actually owns those loans when it comes time to foreclose. In some cases, plaintiffs are alleging that MERS’s structure itself has stripped the loan owners of any legal authority to reclaim the property. As one class action lawsuit filed last month in Kentucky puts it: “They created a truly effective smokescreen which has left the public and most of the judiciary operating ‘in the dark’ through the present time.”
But courts have varied wildly in their opinions of MERS. Some courts, particularly at the state level, have called the entire MERS enterprise into question. But several federal courts have been more favorable, ruling that MERS shares many of the actual owner’s rights — including, in some instances, the right to foreclose.
Missouri is a microcosm of that split. A state appellate court decision issued last year has provided ammunition to foreclosure defense lawyers across the country. But in July, a federal judge in St. Louis all but overturned the state court’s holdings. And last month, a federal bankruptcy judge issued an opinion hailed by MERS supporters as vindicating their position.
“That’s going to be cited every time we’re involved in a case, you can bet on that,” said Patrick Randolph, a law professor at the University of Missouri-Kansas City and a MERS defender. “We’re hoping that will start to set the record straight.”
MERS’s purpose is fairly straightforward. Companies in the mortgage banking industry created it as a way to electronically track loans separate from the paper-based recording systems used in county courthouses. Each loan is assigned a unique number that stays with it for the life of the loan, no matter how many times it changes hands.
One of the system’s central features is to name MERS on the mortgage or deed of trust, the instruments that allow the holder of the loan’s note to seek foreclosure if the loan isn’t repaid. By listing the mortgagee as MERS, the deed of trust can be assigned to any other MERS member without the need to separately record each transaction.
“MERS helps the mortgage finance process work better,” MERS Chief Executive Officer R.K. Arnold wrote in a recent statement on the company’s website. “The MERS process of tracking mortgages and holding title provides clarity, transparency and efficiency to the housing finance system.”
MERS also appoints employees of their member companies as officers of MERS. Those employees then bring foreclosures in MERS’s name, although the person signing the document actually works for the underlying lender.
Those practices have created some confusion. In one sense, MERS is merely an agent of whatever entity actually owns the loan. But because it is also listed as the mortgagee, MERS also appears to be the actual owner of the loan, even though it collects no payments.
“They seem to be claiming to be both an agent and a principle with respect to the same property right,” said Christopher Peterson, a law professor at the University of Utah and a prominent critic of MERS. “That is incoherent.”
A ‘straw man’
Courts have struggled to define exactly what MERS is, and advocates on both sides can point to opinions in their favor. The Supreme Courts in Kansas and Arkansas both ruled against MERS in 2009. As the Kansas high court put it, MERS is a “straw man” that didn’t need to be notified when a property in which it claimed to have an interest went into foreclosure.
“MERS’s contention that it was deprived of due process in violation of constitutional protections runs aground in the shallows of its property interest,” Judge Eric S. Rosen wrote.
In Missouri, the Court of Appeals Eastern District reached a similar conclusion in a procedurally different case. In Bellistri v. Ocwen Loan Servicing, a man who bought a Jefferson County house at a tax sale faced a challenge from the servicer for Deutsche Bank, which had bought the loan on the house. Neither Deutsche Bank nor Ocwen were listed on the deed of trust, but MERS was. Ocwen said that because Robert Bellistri failed to send notice to MERS (which would have passed the notice onto Ocwen), the sale shouldn’t have been allowed.
In a March 2009 opinion, Judge Nannette Baker ruled that Ocwen had no “legally cognizable interest” in the property because there was nothing in the record indicating that MERS had transferred the promissory note from the original lender to Ocwen.
Foreclosure defense attorneys seized on language in the opinion that implied that MERS created a “split” between the note and the deed of trust, essentially making it “impossible for the holder of the note to foreclose.”
Ocwen appealed to the Missouri Supreme Court, saying the Eastern District’s ruling “raises major questions about the ability of a loan servicer to do its job.” But while the Supreme Court was considering whether to accept the case, MERS — which had not been a named party in the case and claimed it learned of the case through an article on the Internet — filed a separate federal lawsuit, arguing it had been unconstitutionally deprived of a property interest.
The Supreme Court ultimately declined to hear Ocwen’s appeal, but the federal suit — Mortgage Electronic Registration Systems v. Bellistri — got results. In July, U.S. District Judge Charles Shaw said the “result in the tax sale proceeding threatens the plaintiffs’ overall business model — at least in Missouri.”
Shaw threw out Bellistri’s deed, saying MERS “unambiguously” had a right to be notified of the tax sale. The judge also ruled that MERS’s due process rights were violated, because the tax sale divested it of a “protected property interest” — its right to foreclose.
Shaw isn’t the only Missouri federal judge to side with MERS. A trustee, relying on the state court’s Bellistri decision, had argued that because the loan servicer didn’t have both the note and the deed of trust in its possession at the time the borrower declared bankruptcy, the deed of trust was unenforceable.
On Sept. 20, Judge Arthur Federman, of the Bankruptcy Court for the Western District of Missouri, shot down that interpretation.
“Assuming that the note-holder is a member of MERS, thereby creating an agency relationship, the fact that MERS is identified as the beneficiary under a deed of trust for the benefit of the note-holder does not create a split between the note and deed of trust,” Federman wrote.
A ‘profound connection’
So what does the esoteric nature of MERS have to do with the current allegations of sloppy foreclosures and fraudulent practices? Nothing, said Randolph, the UMKC law professor. He is also of counsel with Husch Blackwell, which has represented the mortgage industry in several MERS-related cases, although Randolph was not personally involved in any of the litigation.
“Nobody condones or approves what happened in these robo-signing situations,” he said. “I will say this: The likelihood is very strong that what they robo-signed was correct information, and that ultimately the foreclosures will go ahead.”
But critics of the system aren’t so sure. Andrea Bopp Stark, of the Molleur Law Office in Biddeford, Maine, is prosecuting a class action on behalf of people who say they lost their homes to fraudulent procedures. She said she may add claims that address MERS’s role.
“They’re all interrelated,” she said. “It was just a matter of mass production of foreclosure paperwork.”
Peterson, the Utah law professor, said there is a “profound connection” between the current allegations of document fraud and the legal challenges to MERS. He said companies relied on MERS to act as a “proxy mortgagee” and therefore didn’t bother to keep a lot of their paperwork. But courts in some states have become increasingly reluctant to allow foreclosures in MERS’s name. And in May, mortgage giant Fannie Mae forbade foreclosures in MERS’s name for any of its properties nationwide.
“MERS created the illusion of the ability to foreclose when it wasn’t really there, giving a false sense of security to [loan owners] that were careless in maintaining their documents,” he said.
Peterson predicts more litigation will emerge. Although he admits that the paper-based system prescribed by law is clunky, he said counties could argue that lenders’ use of MERS deprived local governments of the fees that would have been paid on all those unrecorded transactions.
“If you start adding up how many recording fees they didn’t pay on assignments, all of a sudden we’re talking about a good chunk of change that county governments could have used to pay their teachers and police officers and firefighters,” he said. “I think that would be a little bit of poetic justice.”
Into the ‘black box’
MERS denies that its system caused the current paperwork problems or that its practices led to the underlying housing marking collapse. Spokewoman Karmela Lejarde wrote in a statement that “without MERS the current mortgage crisis would be even worse.”
“MERS is the only publicly available comprehensive source for note ownership,” she wrote in a statement on the company’s website.
“While this information is tracked through the MERS System, the paperwork still exists to prove actual legal transfers still occurred. No mortgage ownership documents have disappeared because loans were registered on the MERS System.” Lejarde also said MERS fully complies with recording statutes.
MERS points out that loans’ ownership information can be tracked through its website, http://www.mersinc.org.
But Phillip Gebhardt, of Gebhardt Real Estate and Legal Services in Desoto, said his experience is that MERS is a “black box.” Gebhardt, who represented Robert Bellistri at the state and federal level, said he sometimes spends hours “finding intelligent life at a lender” — that is, calling 1-800-customer service numbers searching for someone with authority to negotiate.
“There are some real-world consequences to this paper mess,” he said. “If you can’t figure out who owns the note on the basis of the paper documents before you, because nothing is recorded, how do you make sense out of the situation?”