Could 62 million homeowners be secure from foreclosure because their mortgages are held by an industry-run electronic mortgage registry that a California bankruptcy court recently ruled cannot be used to establish ownership of the loans?
That question has been bubbling up on web sites and news shows across the country for two years, but these days the volume is rising in the wake of a series of successful legal challenges against the Mortgage Electronic Registration System (MERS), which was created by lenders to streamline the mortgage process by using electronic commerce to eliminate paper and facilitate the securitization mortgages.
The potential for chaos is huge. Foreclosures across the nation could stop dead in their tracks. Homeowners could strategically default without fear of losing their homes. Lenders will exit mortgage finance leaving it to government agencies like FHA. Investors would flee the secondary mortgage markets. Home sales and home values would plummet as buyers won't find financing. Consumers who have purchased foreclosed homes whose previous owner's mortgage was held by MERS may not have clear title, MERS' critics claims.
At the heart of the cases brought by owners facing foreclosure is the requirement that to foreclose on real property, lenders must be able to establish the chain of title entitling it to relief. MERS maintains it is a merely an entity appointed by the true owner simply for the purpose of holding property in order to facilitate transactions. But several recent court opinions agree‒and ruled that to foreclose on real property, lenders must be able to establish the chain of title entitling it to relief.
On May 20, a California bankruptcy court held that MERS could not foreclose because it was a mere nominee; and that as a result, plaintiff Citibank could not collect on its claim. Since MERS did not own the underlying note, it could not transfer the beneficial interest of the Deed of Trust to another.
The California decision inspired similar legal challenges to MERS across the country, including a class action filed in Florida in July seeking relief against MERS and an associated legal firm for racketeering and mail fraud.
Since 2006, Fannie Mae has ordered that mortgage services bringing foreclosure actions not to name MERS as a plaintiff in judicial foreclosure actions. In May, it extended the policy to non-judicial actions as well, requiring the servicer to bring the action its own name.
Joe Murin, former CEO of Ginnie Mae, argues there is less to the MERS mess than meets the eye. He writes on the Voice of Housing blog:
"When a borrower signs the mortgage security instrument at closing, they grant and convey the legal title to the mortgage to Mortgage Electronic Registration Systems, Inc. (MERS) and MERS is the mortgagee. As the agent for the promissory note owner, upon instructions from the owner, MERS will commence a foreclosure. The mortgage instrument states that MERS has the right to foreclose and sell the property. Courts around the country have repeatedly upheld and recognized this right.
"Remember, MERS is the mortgagee of record and acts as the note holder's agent. If the noteholder wants to foreclose, MERS needs to carry out their responsibilities to their client. MERS, like any mortgagee, needs to produce documentation (often signed original note/deed) as indisputable evidence of ownership in a mortgage. In some cases where MERS did not or cannot produce the documentation, the foreclosure actions have been cancelled. However, the right for a lender or a lender's agent to foreclose because of a lost Deed or assignment does not, generally speaking, expunge a borrower's obligation to pay a debt – it just might not be a collateralized loan anymore."
MERS has also responded by providing information to homeowners on servicers and investors in MERs mortgages accessible through its website by property address. The site encourages homeowners to correct personal information online. It is also working with states and cities to provide registry services through its database of foreclosed properties and property preservation contacts for vacant properties.